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W 






































The Cause and Prevention 


OF 

Bank Defalcations 


By 


MARTIN K. FOWLER 






New York 

The Bankers Publishing Company 
1924 





H Or 1 lo ' ^ 

.Pi 3 


Copyright 1924 

The Bankers Publishing Company 




A 

A 

VP 







printed in u. s. a. by 
WARREN PUBLICATIONS PRESS 
CAMBRIDGE. MASS. 

SEP 15 *?4 

©Cl A 8008 48 

1 




CONTENTS 

Page 


Preface . 1 

By Whom Is this Loss Borne?. 9 

“Why Not Let the Surety Companies Worry?” 11 

How Much of this Great Loss Might Be 
Saved ? . 13 

What Effort Is Being Made to Check These 
Losses ? . 15 

How Many Cases Are Successfully Prose¬ 
cuted ? . 17 

Would More Severe Penalties Be the Remedy? 20 

Prevention vs. Prosecution. 22 

What Is a Defaulter?. 26 

What Is the Cause of a Defalcation?. .. 27 

* How Are We to Prevent Defalcations?. 29 

The Desire and How to Attack It. 30 

Stock Market Operations. 40 

Forcing the Desire on Tellers. 48 

“Shaving” Notes. 54 



























PREFACE 


IL/i ANY books have been written on the 
**** subjects of bank examinations, bank 
defalcations and on the duties of bank 
directors, but in this volume, which might 
be called a “straight-from-the-shoulder” 
talk to bank directors, the writer has en¬ 
deavored to produce the sum total of these 
subjects. The purpose in summing up at 
this time is the idea, I might say the hope, 
of bringing home to directors a full reali¬ 
zation of their duties, particularly in re¬ 
gard to defalcations. 

Disregarding their personal responsi¬ 
bility and liability, it must also be remem¬ 
bered that bank directors are public offi¬ 
cers, and, as such, should not betray the 
confidence placed in them by the public, 
which some of them unintentionally seem 


BANK DEFALCATIONS 


to do. Unfortunately many of these men 
do not recognize conditions in their insti¬ 
tutions which invite and encourage defal¬ 
cations. Irregular practices, however 
small, which are dangerous, and have been 
known to breed crime, are pointed out at 
this time so as they may be guarded 
against. 

The writing of this volume was 
prompted by the many questions asked 
by bank directors, who were shrewd 
enough to realize that there was much 
“behind the scenes” in banking routine 
with which they were unfamiliar. That 
these men may benefit from the writer’s 
experience and their impressions be last¬ 
ing, resulting not only in personal gain 
to themselves but in the attainment of a 
great public good, is the author’s aim. 

Martin K. Fowler. 
Newark, N. J., July 1, 1924. 


f 2 1 


BANK DEFALCATIONS 


T T may be surprising to many readers to 
A know that there are hundreds of men 
ruined and several million dollars lost 
annually through bank defalcations, and 
these figures show a dangerous and un¬ 
necessary increase every year. One surety 
company alone showed a net loss of five 
hundred thousand ($500,000) dollars for 
the year 1922 on bank defalcations only. 
Considering the number of surety com¬ 
panies issuing this form of protection, and 
the many losses sustained by directors 
over and above the amount of their surety 
bond, together with the costs to the Fed¬ 
eral and various state governments, an 
estimate of an annual loss of five million 
($5,000,000) dollars would seem indeed 
small. 


[ 3 ] 


BANK DEFALCATIONS 


An inspection of newspaper files in 
any of the public libraries might cause one 
to think that this estimate should at least 
be doubled and possibly trebled. In addi¬ 
tion to the losses just referred to are the 
cases where the stockholders, and even the 
depositors, must bear part of some par¬ 
ticular loss. 

Glancing at the costs to the Federal 
Government for the investigation and 
prosecution of hundreds of cases every 
year, some idea may be had from a rough 
estimate made by a government official. 
A United States attorney was engaged in 
prosecuting a case, the trial of which lasted 
about a week. There was nothing un¬ 
common about this particular case nor was 
this attorney one who was given to exag¬ 
geration, as his reply indicated. He was 
asked to state a figure which, in his 
opinion, would represent the cost to the 
Government for the investigation and 
prosecution of the case in which he was 

[ 4 ] 


BANK DEFALCATIONS 


engaged. He replied that this was rather 
an unfair question to expect him to 
answer, hut after discussing the question 
for a few minutes, he stated that he was 
reasonably sure it had cost several thou¬ 
sand dollars. Other attorneys and court 
attaches in the court at the time made 
rough estimates of ten thousand ($10,000) 
dollars. 

The report of the Attorney General of 
the United States for the fiscal year of 
1922 shows that three hundred and thirty- 
eight (338) cases were reported to his 
office during that period. The total num¬ 
ber of cases cannot he multiplied by the 
estimated cost of the individual case just 
referred to, as some of them may have been 
disposed of with pleas of guilty and, there¬ 
fore, little or no expense outside of the 
regular legal machinery, the maintenance 
of which is also a cost to the Government. 
On the other hand, many of these cases 
may have cost more than ten thousand 
[ 5 ] 


BANK DEFALCATIONS 


dollars, the estimated cost of the individ¬ 
ual case referred to. There does not seem 
to be any way of obtaining the figures on 
the actual cost of any particular case. 

An idea of these costs may be obtained 
by a review of what actually happens in 
the case of a defalcation in a national 
bank. The regular Treasury Department 
examiners are usually responsible for the 
first disclosure of an irregularity, some¬ 
times merely “scratching the surface”. 
This irregularity is reported to the Attor¬ 
ney General’s office and from there it goes 
to the Department of Justice. This de¬ 
partment sends out men trained in bank¬ 
ing, accounting and investigation, and 
with a knowledge of court procedure and 
what constitutes evidence. These men are 
given ample authority to “dig to the very 
bottom” and there is no limit placed on 
the time to be consumed or the expense to 
the Government. The criminal investiga¬ 
tion is then begun to fix responsibility on 
[ 6 ] 


BANK DEFALCATIONS 


all involved and to collect evidence pre¬ 
paratory to prosecution. Some of these 
investigations will run along for many 
months or a year and cost several 
thousand dollars in salaries and expenses. 
Then the case is presented to a grand jury 
and then tried before a petty jury, and 
sometimes retried. Some of these trials 
will last a week or ten days and require 
the bringing of witnesses from many dif¬ 
ferent parts of the country at the expense 
of the Government. 

Just consider the number of investiga¬ 
tions and trials that are in progress year 
after year and you may imagine this 
enormous cost. 

The Attorney General’s report shows 
further that the Government collected 
fines totalling $14,550 for the year on vio¬ 
lations of the National Banking Act. 
Possibly this small sum would remunerate 
the Government for the prosecution of a 
few cases, and the others would represent 
[ 7 ] 


BANK DEFALCATIONS 


a total loss. This report also shows that 
sentences aggregating 116 years, 4 months 
and 9 days were presented to bank de¬ 
faulters. This would seem to indicate 
that the public must stand the cost of sup¬ 
porting certain individuals during ex¬ 
tended “vacations” who are well able to 
and should be supporting themselves. 

We must also consider the unknown 
costs to the various state governments for 
the prosecution of hundreds of cases in 
state banks and trust companies every 
year. These cases are handled by the local 
and state authorities, and paid for directly 
by them. In the last analysis, however, 
whether it be a Federal or state case, the 
public must shoulder the costs. 

Last, but by no means least, we have 
the great human loss, the ruination of the 
lives of hundreds of young men every 
year, men who were not entirely to blame, 
not morally so, at any rate, and yet they 
have been branded for life. Year after 
[ 8 ] 


BANK DEFALCATIONS 


year more bank men drift from useful 
occupations, where they are a benefit to 
society, to the penal institutions, where 
they are supported by society. It matters 
not if they are penalized lightly or 
severely, their lives are ruined. Many 
simply join the “down-and-out” class 
where they are a positive menace to so¬ 
ciety. The chances of their being of fur¬ 
ther use to themselves or anyone else are 
indeed slim. Possibly a death sentence in 
many cases would be an act of mercy. 

By Whom Is this Loss Borne? 

At a glance it would seem that most of 
this loss was borne by the surety compa¬ 
nies, and, therefore, they alone should be 
concerned. This view of the situation is 
not only erroneous but dangerous, inas¬ 
much as human nature is more or less sel¬ 
fish and the attitude of “who wants to help 
the other fellow save” might prevail and 
[ 9 ] 





BANK DEFALCATIONS 


thereby tend to increase and not decrease 
the number of embezzlements. 

It is understood by almost everyone 
that more cannot be taken from a corpo¬ 
ration than goes into it, hence the rates on 
fidelity bonds must be based upon actual 
losses. While the surety companies may 
appear to be the direct losers, they are 
actually only the agents in distributing 
these losses, which are spread out and 
handed back to the public in another form. 

As must needs be, all great losses are 
absorbed by the public, therefore it be¬ 
comes the duty, not alone of the surety 
companies but of every public-spirited cit¬ 
izen and organization in the country, to 
give aid and encouragement in helping to 
check this great waste. 

When the public realize that they are 
the real losers, when they so often read of 
bank defalcations and when they under¬ 
stand further that many of these losses 
could have been prevented by diligent 

[ 10] 


BANK DEFALCATIONS 


bank directors, then we may expect an 
outburst of public fury against those di¬ 
rectors in whose institutions defalcations 
occur. Then, only, will some directors 
fear the occurrence of a defalcation. 

It frequently happens that directors 
and even stockholders are compelled to 
make up losses which exceed the amount 
of the surety bond. If this were more 
often the case the number of defalcations 
would be considerably reduced. Occasion¬ 
ally an institution is forced to close its 
doors as a result of irregular practices. 
These are cases where the public usually 
stand a large portion of the loss directly. 

“Why Not Let the Surety Companies 
Worry V* 

The bankers who take this attitude, 
and unfortunately there are many of them, 
are the very ones responsible for a large 
[ii] 




BANK DEFALCATIONS 


majority of the defalcations. They are, 
furthermore, responsible for helping to in¬ 
crease the population of our penal institu¬ 
tions, not to mention the ruination of many 
young men. 

Just think of a large bank in which a 
defalcation of approximately $50,000 oc¬ 
curred, permitting the same conditions 
which furnished the opportunity for this 
theft to exist for a whole year after. When 
the attention of the officers of this bank 
was called to this negligence they stated 
that they intended to change that danger¬ 
ous custom. Banks like this should be 
compelled to make these changes forth¬ 
with, but of course the surety company 
made good once and will make good again, 
so why worry or even hurry. 

Surety companies are not charitable 
institutions, and, as stated before, they are 
not really losing anything. 

Bank directors who think they are 
fooling these companies are really fooling 
[ 12 ] 


BANK DEFALCATIONS 


themselves and the public whom they rep¬ 
resent. 

Directors who take this view, caring 
not for prevention hut relying solely on 
their surety protection, should stop to 
consider the size of a possible defalcation. 
What guarantee have they that their de¬ 
faulter, if they should have one, will keep 
his theft down to the amount of the bond? 
Hundreds of directors have had to dig 
i and scratch for every dollar on which they 
could lay their hands, money for which 
they had worked hard and saved, to make 
good defalcations which were greater than 
their surety bond covered. They have 
learned their lesson, although late. 

How Much of this Great Loss Might Be 
Saved? 

After much investigation the writer 
believes that at least one-half of the losses 
caused by bank defalcations could be 
[ 13 ] 





BANK DEFALCATIONS 

spared if all bank directors throughout 
the country were “up to their jobs”. 
There is no doubt but that fifty per cent, 
of the defalcations are a direct result of 
faulty management. The responsibility 
is, therefore, fixed on the directors as a 
class, they being in supreme command of 
the management of their institutions. 
There are thousands of these men who are 
directors in name only, masters in their 
own line of business, no doubt, but totally 
unfamiliar with banking routine and, 
therefore, not fully qualified to direct the 
safeguarding of other peoples’ money. It 
is true that many of these men are ex¬ 
tremely busy with their own business and 
cannot give the bank much of their time. 
They have accepted a large responsibility, 
however, whether they realize it or not, and 
should not dare to be derelict in so great 
a duty to themselves and to the public. 
One of the purposes of this volume is to 
put these busy men on notice of their duty, 

[ 14 ] 




BANK DEFALCATIONS 


i to point out danger signals, and to tell 
them, briefly, how to be on guard, without 
using much of their time. This book is 
intended to be a respectful effort to induce 
bank directors to apply to the conduct of 
a bank a little of the common sense which 
made their own business successful. 

What Effort Is Being Made to Check 
These Losses? 

It does seem as though it were about 
time some serious thought was given to 
this situation. It is hard to believe that in 
our modern and progressive country of 
over one hundred million people, whose 
very watchwords are efficiency and econ¬ 
omy, that no direct and concerted effort 
has been made to check this tremendous 
waste of men and money. 

This condition is not improving as 
time goes on, but is rapidly becoming 
worse, and yet no campaign worthy of 
[ 15 ] 





BANK DEFALCATIONS 


being called an effort is in force to “plug” 
these leaks. 

Serious as this situation is the fact that 
so many of these defalcations could easily 
be prevented, and the losses attached 
thereto spared if a real effort in the right 
direction were made, makes the situation 
the more flagrant. 

The surety companies would be the 
logical interests to carry on a campaign 
of this nature because they alone could in¬ 
sist upon reforms, if education were un¬ 
availing. These companies would be doing 
a public work and should be aided and 
supported in so doing whole-heartedly by 
the national and state governments. 

We are living in an age of reforms of 
every nature—reforms by legislation and 
by education, some successful and some 
not. 

Success in undertaking to bring about 
a reformation in regard to the causes of 
[ 16 ] 




BANK DEFALCATIONS 


bank defalcations would not be a remote 
possibility. 

Bank directors, as a class, are most 
all real men enough to see their duty and 
do it, so why wait for any campaign or 
reform movement to force their hands? 


How Many Cases Are Successfully 
Prosecuted? 

Transcript from the report of the 
Attorney General of the United States 
for the fiscal year ending June 30, 1922: 

Offense — National Banking Act: 
Cases reported, 338; closed, 108; pending, 
93; indictments, 71; recoveries, . .; fines, 
$14,550; sentences, 116 years, 4 months, 9 
days. 

The report from the Comptroller of 
the Currency for the year ending Oct. 31, 
1922, shows that a total of 52 convictions 
were obtained for violations of the na¬ 
tional banking laws; 26 of these cases were 
[ 17 ] 


BANK DEFALCATIONS 


bank officers and 26 employees below the 
rank of cashier. The longest sentence 
given was six years and one day and the 
shortest one day in the custody of the 
United States marshal. Seven cases were 
penalized with fines only. 

It will be noted that the two reports 
referred to above do not reconcile in any 
way and this may be due, in great part, to 
the difference in the periods covered. Con¬ 
sidering these reports individually they 
each show the difficulty in obtaining con¬ 
victions and the mild penalties inflicted. 

Bank defaulters are usually of suffi¬ 
cient intelligence to prepare a defense as 
they go along pilfering, and this makes it 
difficult to obtain convictions. If the 
juries would only consider the results of a 
man’s acts, and not the acts alone, there 
would be more convictions. A man’s in¬ 
tent can best be judged by the results of 
his acts. 

Most bank trials must be based on 
[ 18 ] 



BANK DEFALCATIONS 


documentary evidence, and it is hard for 
the ordinary jury to weigh the importance 
of such evidence. Juries like to hear a 
witness testify that he saw the defendant 
steal money before they will convict. It 
is rare indeed that eye witnesses to these 
acts can be found. It is a tax upon the 
mental capacity of a good many juries to 
follow through many involved financial 
transactions and at the same time see the 
streak of criminal intent. From the 
writer’s observations it would seem that 
the most flagrant cases, where the judge 
would actually tell the juries to bring in 
verdicts of guilty, they would do so, but in 
cases where the judge really wished the 
jury to decide and so charged them, by 
leaning neither to the side of the defense 
nor prosecution, they would act like chil¬ 
dren without a leader or without minds of 
their own and play safe to their own con¬ 
science by acquitting or disagreeing. 

[ 19 ] 


BANK DEFALCATIONS 


Much of this kind of evidence seems to go 
“over the heads” of many jurors, and they 
sit at ease until the last day of the trial, 
depending on the charge by the court to 
help them to a decision. If the charge by 
the court is neutral, it is safe to say there 
will be no conviction. And so the default¬ 
ers multiply. 

Would More Severe Penalties Be the 
Remedy? 

Y<es and no. In the locality in which 
the defalcation had occurred and where 
the prosecution is closely followed, a severe 
penalty would undoubtedly prevent the 
spread of the “disease” to adjacent banks, 
as is now often the case. The most severe 
penalties would not succeed, however, in 
bringing about a general reduction in the 
number of defalcations. This condition 
can only be attained by the directors 
[ 20 ] 


BANK DEFALCATIONS 


themselves. No matter how severely one 
unfortunate is punished there will always 
be someone who has not heard of this 
severe penalty or who will take a long 
chance regardless. Our present-day mode 
of living and the weaknesses of human 
nature will perhaps always tend to create 
the desire in some to pilfer, notwithstand¬ 
ing the consequences. As long as we can 
never eliminate but just retard the desire, 
then our only hope is to stamp out the op¬ 
portunity. Remember the bank defaulter 
never intends to steal; he actually believes 
at first that he is just “borrowing”. Then 
why would severe penalties to others deter 
a man from “borrowing” ? Directors must 
see that the routine of their bank is con¬ 
ducted so that officers and clerks do not 
have an opportunity to “borrow”. This 
subject is referred to further in another 
section under the heading of “Prevention 
vs. Prosecution”. 

[21] 




BANK DEFALCATIONS 
Prevention vs. Prosecution 

The strongest attack that can be made 
against defalcations is to forestall the 
same with preventive measures; therefore, 
prevention should be the policy, the very 
keynote of every financial institution. 
The most severe and successful prosecu¬ 
tion is far outbalanced by prevention, as 
nothing can be gained from prosecution. 
For the purpose of comparison, I think 
the reader will concede that the most suc¬ 
cessful war is a failure. A prosecution 
means a great loss, sometimes for the de¬ 
faulter, but always for the bank. Some 
may say, why worry about these things 
until they happen, and then we will prose¬ 
cute with every power at our command. 
Just figure the number of years with 
which the defaulter is penalized against 
the time it will take a bank to outlive the 
unfavorable^ publicity, loss of accounts 
and often the loss of actual money over and 
[ 22 ] 


BANK DEFALCATIONS 


above the amount of the surety bond, and 
judge for yourself who the real loser is in 
a defalcation. Try to visualize a bank de¬ 
falcation from my attempted description 
and again decide for yourself if preven¬ 
tion would not be far more profitable than 
the most severe and successful prosecu¬ 
tion. The writer believes that bank de¬ 
faulters should be prosecuted to the full 
limit of the law and dealt with more 
severely than most other criminals, but 
feels that if more thought is given to the 
prevention of defalcations the necessity of 
prosecutions will be reduced to a minimum. 

In the Federal statutes which govern 
national banks the penalty for violation 
of the banking laws was formerly a mini¬ 
mum of five years, and our defalcations 
were few, but today the law requires only 
a maximum of five years and a minimum 
at the discretion of the trial judge, and 
our defalcations are numerous. I do not 
wish to criticize our laws and judges, but 
[ 23 ] 


BANK DEFALCATIONS 

I have seen some defaulters go scot free— 
no prison term at all, simply a fine. One 
case in particular I have in mind is that 
of a bank officer who misappropriated ap¬ 
proximately fifty thousand ($50,000) 
dollars and was penalized with the enor¬ 
mous fine of five hundred ($500) dollars 
and not a single day in jail. Just one year 
later a junior officer in this same institution 
was arrested for an irregularity. I men¬ 
tion the law in this regard for the purpose 
of warning bankers not to depend upon 
the public laws for satisfaction or, I might 
say, vengeance for their loss in the case of 
a defalcation, for they may be disagree¬ 
ably surprised. I have seen cases where 
bank men have violated the banking laws 
most flagrantly, where their very acts 
spoke for themselves, and where every 
single charge made by the prosecuting 
authorities was supported by strong docu¬ 
mentary evidence, and yet juries bring in 
verdicts of “not guilty”. There is no tell- 

[ 24 ] 


BANK DEFALCATIONS 


ing what a trial jury will do. I hope you 
will draw the inference that prosecution at 
its best is far from satisfying. 

Bank directors, make your own laws 
for your particular institution, and have in 
mind while framing these rules and regu¬ 
lations the idea of prevention and not 
prosecution. 

It is inadvisable to extend sympathy 
in any form to one actually involved in a 
bank defalcation. My arguments in this 
book are for the purpose of eliminating 
prosecution as far as possible by prevent¬ 
ing the defalcations, but if they do occur, 
regardless of precautions, then by all 
means prosecute. Do not mislead yourself 
by thinking that the defalcation with 
which you are actually acquainted is any 
different or that there is any more excuse 
for it than thousands of others. Do not 
feel that the person involved, even though 
he may be a lifelong acquaintance and 
even though he may be a victim of circum- 
[ 25 ] 


BANK DEFALCATIONS 


stances, should be treated any differently 
than a common thief. Remember, it is not 
your money he has stolen, but possibly the 
life savings of many poor people, the all- 
in-all of widows and children. His pilfer¬ 
ing, as far as he knows or cares, might 
have caused the bank to close. Did he 
show any sympathy to the depositors or 
consider them in any way when he helped 
himself to satisfy his personal greed? To 
extend any consideration to a bank de¬ 
faulter, regardless of the person or the 
circumstances, makes you a friend in his 
eyes while the sword hangs over his head, 
but he is sure to consider you a weakling 
when he is entirely out of trouble. Force 
the defaulter to respect you as he has not 
respected the laws by demanding a vigor¬ 
ous prosecution. 

What Is a Defaulter? 

It is the writer’s contention that the 
so-called natural-born thief seldom, if 
[ 26 ] 



BANK DEFALCATIONS 


ever, enters the employ of a bank, but that 
the ordinary hank defaulter is an honest 
man who becomes a thief after he obtains 
bank employment. It must be remem¬ 
bered that the bank defaulter seldom in¬ 
tends to steal, according to his own way of 
thinking, but merely imagines that he is 
forced to “borrow”. His past life, family 
connections and references mean nothing 
after he is employed in so far as a guar¬ 
antee against defaulting is concerned. If 
he is seized with the desire, usually under 
pressure, and the opportunity is present, 
then he will, in all likelihood, default. He 
feels that his back is to the wall and to 
“borrow” money is the only way, having 
come to this conclusion because he has seen 
the opportunity to “borrow”. 

What Is the Cause of a Defalcation? 

The usual causes of defalcations, of 
which we hear so often, such as gambling, 
[ 27 ] 


BANK DEFALCATIONS 


business losses, bad associations, etc., are 
not the whole causes. They may be classed 
as the desire. Opportunity, which is the 
other cause, must also be present. The 
desire or the pressure to use money for any 
of the so-called “causes” of defalcations 
would in itself not be dangerous but for 
the fact that it couples up with a state of 
mind bordering on temptation created by 
loose methods, lack of preventive meas¬ 
ures, lack of discipline, etc. In other 
words, owing to some particular looseness 
in the machinery of the bank, the opportu¬ 
nity has been noticed, possibly subcon¬ 
sciously so, and lies dormant in mind only 
to be awakened by the real or imaginary 
pressure for money. We do not know 
which of the two causes of defalcations— 
desire or opportunity — predominates, 
that is to say, whether the desire seeks the 
opportunity or vice versa. It is not within 
the province of man to know just what 
was in the minds of all defaulters immedi- 
[ 28 ] 


BANK DEFALCATIONS 


ately prior to their rash acts. The writer, 
however, has had many heart-to-heart 
talks with bank defaulters while they were 
in a communicative mood and has come to 
the conclusion that the responsibility for 
defalcations is evenly divided between de¬ 
sire and opportunity. 

How Are We to Prevent Defalcations? 

To prevent defalcations entirely we 
would have to eliminate both the desire 
and the opportunity. It must be plain, 
then, that we can never hope to prevent 
defalcations entirely, for desire pertains to 
the human element, where opportunity is 
chiefly the physical feature. As long as 
we have human nature to deal with, the 
desire is bound to crop up from time to 
time. We cannot prevent the creation of 
desire, but we can guard against it and 
retard its growth by continually attack¬ 
ing it. We can eliminate the oppor¬ 
tunity once and for all time. This is, 
[ 29 ] 


BANK DEFALCATIONS 

without doubt, a physical possibility. 
When we have won our fight against the 
opportunity with the weapon of preven¬ 
tion, then we will have been successful in 
reducing defalcations to possibly one-half 
their present number. Remember that the 
opportunity comes into existence with the 
natural growth of the bank, and unless the 
routine is tightened, as the bank grows, so 
the opportunity will grow. 

The Desire and How to Attack It 

We have all heard, more or less, about 
the desire or the pressure to misappropri¬ 
ate bank funds on the part of many bank 
employees. The newspapers refer re¬ 
peatedly to stock market speculation, un¬ 
desirable companions, unsuccessful busi¬ 
ness ventures, extravagance, etc., as being 
the causes of the many defalcations about 
which they write. The press does not go 
into detail, however, to say that the par- 
[ 30 ] 


BANK DEFALCATIONS 

ticular “cause” to which they referred was 
not the complete cause, but just one-half 
of it, and, therefore, only the desire. Pos¬ 
sibly the newspaper writers do not know 
that the other half of the real cause was the 
opportunity to execute this desire. No 
man can be excused for allowing himself to 
be overcome by this desire; on the other 
hand, no director should permit the oppor¬ 
tunity to exist in his institution by means 
of which the desire is fulfilled. What 
would happen if the newspaper told all the 
facts in many cases, and, in addition to the 
damaging remarks concerning the de¬ 
faulter, they added, “the routine condi¬ 
tions in that bank were worse than in a 
country grocery store,” or “the example 
set for this young man by his superior 
officers was such that an ultimate defalca¬ 
tion was only to be expected,” or “the bank 
actually invited its employees to steal”? 
Such comments as those would undoubt¬ 
edly wreck many institutions, yet why 
[ 31 ] 


BANK DEFALCATIONS 


should they be protected? The defaulter’s 
life is wrecked; he was spared no publicity; 
some will say that the public money on de¬ 
posit should be considered. True enough, 
but what guarantee has the public that the 
conditions in that institution will be cor¬ 
rected when the storm subsides ? The pub¬ 
lic might be spared a great loss if the in¬ 
stitution in which a large defalcation oc¬ 
curs was closed immediately. 

It must be understood that the attack 
against the desire as referred to is, at its 
best, weak because this is indeed a one¬ 
sided battle. Our real fight must be to 
eliminate the opportunity. Do not lose 
sight of the fact, however, that if the causes 
which lead up to or precede the desire are 
properly guarded against it would be a 
great aid in reducing the number of defal¬ 
cations even though the opportunity did 
exist. 

The general public well know that 
stock market operations are extremely 

[32] 


BANK DEFALCATIONS 


dangerous, particularly for a man in a 
trusted position. Statistics prove beyond 
a doubt that this form of gambling has 
caused the desire to default in a very large 
majority of all cases on record. Yet 
there are possibly thousands of directors 
who are ignorant as to whether any of their 
employees are interested in the stock mar¬ 
ket, and would not take the trouble to find 
out. Yet these directors will make great 
efforts to have the public bring in more 
and more funds of which they are to be the 
custodians. There are many directors 
who wink at the practice and others who 
openly discuss stock market operations 
with their bank employees. 

The writer has seen cases where the 
entire working force of banks, including 
all officers and every clerk down to the 
janitor were in “pools,” as they called it, 
to “play” the market. Just think of it— 
think of your wife, if she were a widow, or 
your mother having all the money or secu- 
[ 33 ] 


BANK DEFALCATIONS 


rities they possess in an institution of this 
kind! If you permit anyone to put money 
in your bank when conditions of this 
nature exist you are certainly committing 
a major crime for which you may have to 
answer. 

Before it is too late, and before any of 
your employees fall into the clutches of the 
stock market, decide to become a little in¬ 
quisitive. Watch the man who is forever 
studying the quotation page of the daily 
newspaper and the man who receives the 
chance circular from a brokerage house, 
even though it is apparently a mere cir- . 
cular. Of course, his name may have 
gotten on the “sucker list” through no 
fault of his own or the circular may have 
reached him at the bank through an error 
on the part of the brokers in not sending 
it to another address. Keep your eye on 
the man who makes and receives frequent 
telephone calls and learn the source and 
destination of these calls. An inquiry or 

[34] 




BANK DEFALCATIONS 


two at this time may save you and others 
a fortune. Of course the officer delegated 
to purchase securities for the account of 
the bank or its customers must keep him¬ 
self familiar with the moves of the security 
market. This must be taken into consid¬ 
eration. This officer, even though he be 
above suspicion, should not be permitted 
to operate on the market for his own ac¬ 
count. If this officer favors one particu¬ 
lar bond house or salesman with the bank’s 
patronage his reason for so doing should 
be inquired into. If this bond house repre¬ 
sentative is a personal friend of his, this 
should warrant further inquiry. 

It would be a difficult matter to in¬ 
struct directors how to guard against or 
attack the desire other than to say they 
should keep in close personal touch with 
their employees so that they will be in a 
position to attack the cause for the desire 
before the desire itself is created. This 
would be an easy matter in a small bank 
[ 35 ] 








BANK DEFALCATIONS 


and in the large institution a personnel de¬ 
partment or manager should be relied upon 
for this work. The causes which precede 
the desire are well known, but to know 
whether any employee was in the grip of 
one of these causes it would be necessary 
to know something about his private af¬ 
fairs—how he spent his spare time, etc. 
The active officers can easily keep in per¬ 
sonal touch with the employees by reason 
of their close association, where there are 
not many employees. The directors 
should remember, however, that officers, 
just as frequently as clerks, drift into posi¬ 
tions which cause them to be seized with 
the desire. Directors should not fear 
being considered “over-inquisitive,” for in 
this attitude they are fulfilling their duty 
and demonstrating that their public re¬ 
sponsibility is not too large for them. 
Remember that a defalcation seldom oc¬ 
curs in an institution where there is at 
[ 36 ] 


BANK DEFALCATIONS 


least one “over-inquisitive” director on the 
board. 

The private life of officers and clerks 
cannot safely be ignored. If you were 
going to entrust several thousand dollars 
in cash or negotiable securities, your own 
property, with someone to take care of 
for you, would that person be one who was 
scratching to make both ends meet, or one 
who gambled, kept bad company or had 
other undesirable habits? Of course not. 
Then why expect the public to take a 
chance like that? You may say that the 
public are not taking any chances of this 
kind in your institution; that is a very nice 
way for directors to feel, but while state¬ 
ments of this kind are generally assump¬ 
tions, they should be founded on facts as 
a result of the directors’ own investiga¬ 
tions. 

Do not try to grind bank employees 
down to starvation wages. Remember 
they have to live as well as stockholders 
[ 37 ] 


BANK DEFALCATIONS 


and that they, too, have expenses to meet. 
Stockholders have their money invested, 
and employees have their lives invested in 
the business. Give them their pro rata 
share of what they are earning as interest 
on their lives invested. Pay them a fair 
living wage in keeping with the times, plus 
enough extra to create a surplus. Then 
cull out those who do not save, and if after 
investigation the reason is found to be ex¬ 
travagance, replace them with others who 
are more thrifty and more reliable. This 
same advice should apply to those who are 
forever borrowing from their fellow work¬ 
ers. Watch the officer or employee who is 
over friendly with one special customer, 
and if some particular customer chats too 
long at a teller’s window find out the rea¬ 
son for it. People don’t usually waste 
their time for nothing. Pay particular at¬ 
tention to the officer or clerk who is inter¬ 
ested directly or indirectly in some outside 
business enterprise. Look carefully over 

[38] 


BANK DEFALCATIONS 


every transaction affecting this enterprise. 
The man whose domestic relations are not 
running smoothly should also come under 
close scrutiny. Encourage your employees 
to purchase stock in their institution, aid 
them by offering easy payments. This 
will give you a line on those who save and 
those who do not, besides being an obvious 
benefit to the institution. Encourage your 
employees to open checking accounts in 
other banks, friendly institutions, to pay 
their current expenses. An occasional in¬ 
spection of these vouchers is one of the 
best ways to get a line on a man’s private 
life. Make it a hard and fast rule not to 
allow the overdrawing of any account no 
matter who the customer may be, and do 
not allow any employee to pay against un¬ 
collected checks except on authority from 
an officer for each particular item. 

Keep your bookkeepers away from 
customers and the telephone as much as 
possible. They are a part of the inner 
[ 39 ] 


BANK DEFALCATIONS 


workings of the bank, and business with 
them should be done through the officers. 
Do not allow officers to make loans per¬ 
sonally to any customers of the bank. 

Remember that the desire is not always 
a result of some personal pressure upon 
the defaulter. Often an officer or employee 
finds the desire thrust upon him owing to 
bad customs, such as tellers making good 
differences, “shaving notes,” etc., or the 
over-accommodation of customers, such as 
permitting check kites and many other 
practices, some of which follow the ac¬ 
ceptance of gratuities by employees. 

Stock Market Operations 

Wall Street has been described as a 
street with a river on one end and a grave¬ 
yard on the other. Whoever described 
“The Street” in this way, where fortunes 
are seldom won but often lost, must have 
had in mind the fate of many bank em- 
[ 40 ] 


BANK DEFALCATIONS 


ployees. Frequently a bank employee will 
try to justify his stock trading to himself 
or to others when called upon for an ex¬ 
planation by stating that he is not specu¬ 
lating but merely investing. Close exami¬ 
nation of his operations will generally re¬ 
veal that what he is really doing is just 
plain ordinary trading in the stock mar¬ 
ket. After all, what is the difference be¬ 
tween speculating or investing, as he calls 
it, for in one instance he borrows from the 
broker and in the other he borrows from 
other sources. Even if he does use his own 
money he is playing the worst kind of a 
gambling game, and heavy losses may 
cause him to borrow or even steal for the 
purpose of playing the game further in 
hope of getting back some of the money 
which he feels Wall Street has taken from 
him. The few-and-far-between individ¬ 
uals who will take their own money, for 
which they worked hard and saved by the 
greatest sacrifices, certainly are not fit 
[ 41 ] 


BANK DEFALCATIONS 

bank employees when they risk these sav¬ 
ings in operations with which they are un¬ 
familiar. Bank clerks are not usually in 
this class. They try to finance themselves 
in other ways. A peculiar thing about a 
bank clerk financing himself illegitimately 
to trade in the stock market is the fact that 
few, if any, of them ever have any inten¬ 
tion of actually stealing. They all feel 
that they are just “borrowing” the money 
and are positive that they will not only 
win enough to pay it back but will also 
show a handsome profit to themselves. I 
have known these men to be many thou¬ 
sands to the bad with no possible chance 
of repaying the “debt,” and still found 
them to be very optimistic of the future 
right up to the very minute of their ar¬ 
rest. They then console themselves by 
feeling that it is the fault of the authori¬ 
ties that they lost, and that if they had not 
been arrested just when they were every¬ 
thing would have turned out well. In 
[ 42 ] 



BANK DEFALCATIONS 

speaking of bank employees under this 
heading the writer means to include every 
junior and executive officer connected with 
the bank in an active capacity. By far 
the larger number of those who fall vic¬ 
tims to this game are officers. They are 
inclined to have more confidence in them¬ 
selves than the younger clerks and their 
success in attaining a higher position some¬ 
times creates a large opinion as to their 
ability. Little do they realize that they 
are mere nothings in the speculative world 
which is infested with many hungry 
wolves who are constantly in search of the 
acquaintance of men in trusted positions. 
These parasites are smooth and clever and 
it is impossible to beat them at their own 
game. They are not clever enough, how¬ 
ever, to beat the market themselves, in 
fact, it is a question whether anyone is 
really clever enough for this. This ele¬ 
ment does not try to beat the market— 
they know better—so confine their efforts 
[ 43 ] 


BANK DEFALCATIONS 

to beating easy victims by using the mar¬ 
ket as a cloak. The reader must not as¬ 
sume for a minute that all stock operators 
are crooked, for this is far from being the 
truth. The responsible and reputable 
brokers are in the large majority and 
many of these men are of the very highest 
character—gentlemen in every sense of 
the word. These men, however, are not 
reaching out for the business of bank 
clerks; they not only do not encourage it, 
but positively refuse to carry such ac¬ 
counts. If a broker knowingly carries an 
account of a bank clerk directly or indi¬ 
rectly he is not only violating the rules of 
the New York Stock Exchange for which 
the penalty is severe, but he is placing him¬ 
self on record as one of the many unde¬ 
sirables which the real backbone of Wall 
Street has been trying to eliminate. These 
brokers are not members of the New York 
Stock Exchange, as the high character of 
this institution does not permit of any 
[ 44 ] 


BANK DEFALCATIONS 


practices which would be justly criticized. 
The writer has known cases, however, 
where bank clerks have opened accounts 
with brokers who were members of the 
Exchange, by using assumed names and 
by operating under the names of rela¬ 
tives, etc. The brokers in this instance 
were of the very highest character, but 
were deceived into accepting these ac¬ 
counts by one of their own employees who 
could not be trusted. 

A case in mind is where two bank 
tellers entered into a criminal collusion to 
play the market with bank funds. They 
operated with approximately $200,000 of 
the bank’s money for a period of three 
years, during which time they lost every 
cent and without the knowledge of anyone 
connected with the bank. These men were 
putting transactions through approxi¬ 
mately forty different accounts, mostly all 
of which were under assumed names. 
Many of their “brokers” would telephone 
[ 45 ] 


BANK DEFALCATIONS 


them at the bank for more margin and 
other purposes, and even send their mes¬ 
sengers to the bank to get cash, which was 
proof that they knew without any doubt 
that these men were small salaried bank 
clerks, and they must have known they 
were misappropriating the bank’s funds 
when they gambled with ten, fifteen and 
even twenty thousand dollars at a time. 
I dare say the majority of these orders 
were bucketed and the money went into the 
broker’s pocket and not into the market, 
as was supposed. 

Another case in mind is where a 
“broker” who had obtained thousands of 
shares of a practically worthless stock 
through some means without cost to him¬ 
self encouraged and induced a bank clerk 
to buy this stock. He told the clerk 
that he was trying to buy all he could as 
it was a sure thing. He did not tell him 
that he then owned fifty thousand shares. 
He fanned this young man’s enthusiasm 

[ 46 ] 



BANK DEFALCATIONS 


to such an extent that he placed many 
orders through other brokers to buy. This 
“friend broker” was unloading on the 
young man through these other brokers, 
and the bank clerk eventually found him¬ 
self the possessor of these fifty thousand 
shares costing the bank about $100,000. 

These so-called brokers have high sala¬ 
ried men in their employ who are smooth 
talkers and are well dressed and mix 
around socially in hope of meeting easy 
victims. They are known as “new business 
men”. They will often open bank accounts 
and deposit substantial amounts, dropping 
a word now and then to a teller or 
a junior officer as to the profits they 
are making in stock trades. They will 
lead on the teller, and oftentimes the 
officers of a bank, very gradually and 
finally offer suggestions or tips on sure 
things. It is all done so smoothly and 
gradually that the victims never become 
suspicious. They think this tipster is 
[ 47 ] 



BANK DEFALCATIONS 


their friend. Even after the prison gates 
close on these bank clerks it is impossible 
to make them understand that this very 
tipster was responsible for their downfall. 
Wall Street gambling is fascinating and 
contagious; when one man plays the game 
you are almost sure to find one or more of 
his acquaintances or fellow workers doing 
the same thing. His enthusiasm bubbles 
over and he confides in those close to him. 
They thereupon take a chance on his tip 
and so it spreads. The safest practice 
would be to immediately dispense with the 
services of any bank officer or employee 
showing any interest in the stock market 
whatsoever, for this is indeed a danger 
signal. 

Forcing the Desire on Tellers 

Many banks through their officers are 
forcing the desire on their tellers, although 
they may not realize it, by compelling them 
to make good cash differences. 

[48] 


BANK DEFALCATIONS 


The safest policy for a bank to adopt 
is to treat the money which is their stock in 
trade as just so much valuable merchan¬ 
dise so far as the employees are concerned. 
Rules or regulations which bring home to 
the employees the fact that they are really 
handling money are dangerous. Although 
honesty is paramount in the banks 
throughout the country, there would be a 
great many more defalcations but for the 
fact that the money is considered just the 
same as merchandise by most men who 
handle it. Young men sometimes fall 
victims to temptation in the early stages 
of their banking careers, being dazzled at 
the sight and touch of vast amounts of 
cash, simply because they have not learned 
to consider it as merchandise. The great 
majority, however, will go on day after 
day for years handling this “merchandise” 
faultlessly. If they continually had it in 
mind that it was real money and realized 
the power of the large amounts which they 
[ 49 ] 


BANK DEFALCATIONS 

handle, I believe this state of mind would 
eventually weaken the strongest character. 
I have known tellers to pay out large sums 
of money all day long, rarely making an 
error, yet they counted this cash but once 
before handing it over the window. These 
very tellers, after receiving their salary, 
would count this money three times before 
placing it in their pockets. The layman 
might say that these men were more 
careful of their own money than they 
were of the money of the bank, but 
this is not the case. These tellers 
really looked upon the bank’s money 
as merchandise, unconsciously so, and 
justifiably depended on their skill in 
handling it as merchandise. In the same 
way a driver might throw a package from 
a truck, feeling confident that it will land 
right side up, having done the same thing 
so many times before that he was reason¬ 
ably certain of the result. 

[ 50 ] 


BANK DEFALCATIONS 

It is very bad practice for a bank to 
require employees to make good short dif¬ 
ferences which occur in the regular course 
of business. This rule will tend to make 
the employee realize the fact that he is 
handling real money quicker than any¬ 
thing else in the world. This custom 
is ridiculous from every point of view. 
This clerk has certainly not made an 
error intentionally. If he is repeatedly 
careless, change his position. The chances 
are he is not dishonest, for if he were, 
how foolish it would be to show a short¬ 
age when there are so many ways of 
concealing it. Should this man continue 
to have shortages and be compelled to 
make good himself there is bound to come 
a time when he cannot afford to make 
good and will be forced to obtain this 
money in some other way, of which there 
are many in the best managed institutions. 
Suppose a young man on a small salary 
[ 51 ] 


BANK DEFALCATIONS 

had made good several shortages and 
along came an over difference. He would 
naturally feel that this over difference be¬ 
longed to him and was a chance to get 
back some of his money. If this young 
man’s resources were slim at the time he 
might even consider this over difference as 
a true one without making a real effort to 
locate the cause. Right here he commits 
his first theft. Now we have arrived at 
another starting point of many defalca¬ 
tions, and surely we cannot conscien¬ 
tiously blame the young man. The loss 
of money through real clerical errors is 
one of the hazards of the business and 
should be borne by the bank. Employees 
should not be permitted to cash checks for 
themselves, make change for themselves 
or to accommodate customers from their 
own pockets before or after hours under 
any circumstances. These acts will remind 
him that the money in his pocket is the 
same as in the cash drawer. He should 

[ 52 ] 


BANK DEFALCATIONS 


learn to feel that the only real money, as 
far as he is concerned, is that in his pocket 
and that the cash drawer contains only 
valuable merchandise which the bank is 
holding for others. Under the heading 
“Kitty” will be found the proper way to 
adjust short and over differences. 

A prominent but narrow-minded bank 
official tried to argue in favor of having 
his tellers make good cash shortages. Like 
many other bank officers it was useless to 
argue with him, therefore efforts were 
doubled to prove to him the folly of his 
argument. These efforts were rewarded 
by finding hidden away in the vaults of 
one of his tellers many small envelopes 
each marked “cash over” on a certain date. 
These envelopes represented several hun¬ 
dred dollars in over differences, yet they 
were all empty. Was this money taken 
out to make good short differences, or was 
it used for some other purpose by this 
teller? No one knew, not even this official 
[ 53 ] 


BANK DEFALCATIONS 


just referred to, as no record whatever 
was kept of cash differences. Further in¬ 
vestigation developed that this same teller 
was guilty of many practices, which were 
worthy of severe criticism, yet none of 
these acts made any great impression on 
the official in question. This teller, if not 
a defaulter at the time, was surely on the 
road to become one as a result of a vicious 
practice and bad management. 

“Shaving” Notes 

I have found on a number of occasions 
instances where junior officers and even 
tellers were in the habit of discounting 
notes for customers personally and re¬ 
ceiving bonuses in lieu thereof, in other 
words, “shaving notes”. This was done 
for people whose credit did not warrant 
the bank making them a loan, and being 
desperately in need of money they were 
willing to pay well for the accommodation. 

[ 54 ] 


BANK DEFALCATIONS 

To the layman this practice might seem 
regular inasmuch as the teller was taking a 
chance with his own money, and it might 
seem was entitled to make a little extra for 
himself if he could. After a thorough in¬ 
vestigation on these occasions it was re¬ 
vealed that when these practices started it 
was legitimate enough, however unwise, 
but requests were made more frequently 
than these men’s personal funds could take 
care of and the temptation of the bonus 
was too much for them. They “borrowed” 
from the bank and loaned this money per¬ 
sonally along with their own. These “bor¬ 
rowings” did not show in the form of a 
shortage in their accounts as they just 
carried the same along “hung in the air,” 
as it were, until such time as the loans were 
repaid. One of these tellers explained to 
me that he made a loan of all the money 
that he had and when more was sought he 
refused. The borrower thereupon told him 
that unless he obtained it he was “lost”. 

[ 55 ] 


BANK DEFALCATIONS 


This teller explained that it was not the 
bonus on the second loan which tempted 
him to use the bank’s money, but the de¬ 
sire to save his own money which he had 
already advanced. From the foregoing I 
think it can be readily seen that this is a 
dangerous practice and that it is a simple 
matter for an unscrupulous person to 
force a teller in this position until he has 
caused a large defalcation. The inspec¬ 
tion of this young man’s bank account in 
another bank by one of his directors would 
have told the story in ample time. 


Kiting Checks 

Check kiting is indeed a common prac¬ 
tice and is often carried on with the full 
knowlege and consent of one or more offi¬ 
cers. It is occasionally permitted upon 
the instructions of an officer. Sometimes 
an officer will, after becoming more or less 
friendly with a customer, be induced to 
[ 56 ] 


BANK DEFALCATIONS 

accommodate this customer to the ex¬ 
tent of paying his checks against checks 
which have just been deposited. Possibly 
the customer will offer any one of a num¬ 
ber of reasonable excuses which would 
seem to warrant this accommodation. He 
will obtain the same accommodation at an¬ 
other bank or possibly two other banks 
and carry on a three-cornered kite, which 
is, indeed, the most dangerous. In this 
way he obtains cash to carry on his busi¬ 
ness, or to simply steal, as the case may 
be, and offset the same by a series of 
charges from one bank to another. This 
process has to keep moving. Sooner or 
later, however, this movement will stop, 
and the first hank of the three which breaks 
this chain by refusing to pay items until 
they are collected will come out without a 
loss, but the last bank to take this step is 
the one which has to carry the bag. Fre¬ 
quently firms or individuals which are 
hard pressed, or even professional check 
[ 57 ] 


BANK DEFALCATIONS 

ldters, will split the amount they are ma¬ 
nipulating into a number of smaller, un¬ 
even amounts and will use checks of other 
people or trade names which they them¬ 
selves control to miscolor these transac¬ 
tions. Bookkeepers should be instructed 
not to pay against uncollected items under 
any circumstances unless initialed by an 
officer. An examination of the transac¬ 
tions on these accounts which were trying 
to draw against uncollected items should 
quickly reveal to the officer whether or not 
a kite was in force. 

Gratuities 

It is a violation of the Federal reserve 
statutes for a bank officer to receive gra¬ 
tuities. There should also be a rule in 
banks forbidding employees from accept¬ 
ing small favors from customers, which in 
the eyes of the law might not be presumed 
to be gratuities, such as cigars, tickets, 
passes, candy, etc. There is no doubt hut 
[ 58 ] 


BANK DEFALCATIONS 

that the recipient of these gratuities is 
automatically placed under obligations to 
the giver. He will go out of his way to re¬ 
ciprocate in some small way which, nine 
times out of ten, will be all right. But the 
individual who will use this as a stepping 
stone to warm up to some employee may 
happen upon the scene. He will grad¬ 
ually increase his gifts and try for a closer 
acquaintance, which will be followed up 
by requests for certain accommodation. 
When he obtains the first accommodation 
which is not strictly legitimate, he has the 
bank clerk in his power and can force him 
to any limits. His system of forcing is re¬ 
lated elsewhere. Let the reader just try 
going to any man behind a cage, whether 
it be a bank or theatre or a railroad sta¬ 
tion, and hand in a cigar to the man wait¬ 
ing upon him. The effect is sure to be 
noted. After all, it is only human nature, 
but in banks these petty failings of human 
nature must be guarded against carefully. 

[ 59 ] 


BANK DEFALCATIONS 


Gifts from regular customers at the holi¬ 
day season of the year are, of course, ex¬ 
cepted from this class, but their nature 
and the donor should be made known to 
an officer of the hank. 

Salary Advances 

Banks should not permit tellers to ad¬ 
vance money to themselves or other em¬ 
ployees on memoranda which is usually 
carried as a cash item. There are many 
ways in which a teller can manipulate his 
own items of this nature and the other 
employees who do not have access to these 
items are encouraged in living beyond 
their means. Of course, there are excep¬ 
tional cases where an employee has some 
unusual expense as a result of some mis¬ 
fortune. The bank should take care of 
these cases with a direct loan, the same as 
is made to a customer, or an officer should 
take care of the matter personally. 

This advice must not be construed to 
[ 60 ] 


BANK DEFALCATIONS 


mean that the door should he shut to em¬ 
ployees who are temporarily “short” and 
compel them to seek a loan elsewhere, but 
it does mean that these advances, if made 
at all, should be kept strictly apart from 
the bank cash. 

I suggest, along these lines, that an 
officer keep one or two hundred dollars in 
cash (his own personal funds) in his desk 
for the accommodation of employees. Let 
every employee of the bank know of this 
fund and its purpose, and instruct them 
to have no hesitancy in borrowing when 
necessary. The officer would keep a 
record of these advances. The great dif¬ 
ference between a fund of this kind and a 
“kitty” is obvious to any experienced bank 
teller. 

*********** 

It would be superfluous to say more 
about the causes which create the desire at 
this time as there are few of us indeed who 
[ 61 ] 


BANK DEFALCATIONS 


have not at least felt the pressure for 
money at some time in our lives, and if we 
were strong enough to resist the tempta¬ 
tion to satisfy this desire then we should 
lend our strength to others who may need 
it. This can best be done by fighting the 
opportunity so that it will cease to exist, 
then the pressure or desire on the part of 
those who are weak must fail to function. 
Remember that opportunity and desire 
are co-partners and necessary to each other 
for the commission of a defalcation. 

The Opportunity and How to 
Eliminate It 

It would be a hopeless task to try to 
prevent bank defalcations by familiarizing 
bank directors with the many methods em¬ 
ployed by defaulters. Many directors 
would not understand the details of these 
defalcations, particularly in the involved 
cases. The writer feels it would not be 
prudent to publish the details of the many 
[ 62 ] 


BANK DEFALCATIONS 


opportunities already seized upon by 
those with the desire. There are the young 
and inexperienced, who might take a 
chance at imitating, and the older and 
more experienced unfortunate, who feels 
he is forced to seize some opportunity, who 
might use the information to further the 
ends which we are trying to defeat, it 
would be similar to donating ammunition 
to the enemy. 

New schemes seem to crop out over 
night and no two defalcations are exactly 
alike. The human element is an impor¬ 
tant factor which must always be taken 
into consideration, together with the vari¬ 
ous circumstances pertaining to each par¬ 
ticular case. 

It would be far more important to ad¬ 
vise directors as to the proper and neces¬ 
sary action on their part which would 
eliminate the opportunity without sup¬ 
porting this advice with details which 
would show just why this action is essen- 
[ 63 ] 


BANK DEFALCATIONS 


tial. Every defaulter with whom the 
writer has come in contact has attributed 
the starting point of his downfall to a de¬ 
sire plus an opportunity, which has been 
covered by advice in this volume, possibly 
by one of the “Don’ts,” which do not go 
into detail. 

One of the most flagrant opportuni¬ 
ties, or it might better be called an “invita¬ 
tion to default,” seems to be a condition 
which is prevalent in many banks today, 
and that is the improper method of con¬ 
ducting the savings or interest depart¬ 
ment. In view of the great danger at¬ 
tached to the improper conduct of this 
department, and the fact that there are 
so many banks which do not recognize this 
condition, the writer feels that it would be 
advisable to explain this opportunity in 
some detail to directors, trusting that they 
will see the importance of immediately 
protecting the funds in this classification. 

[64] 


BANK DEFALCATIONS 
Savings or Interest Department 

There are, I dare say, no bank exam¬ 
iners, and a very few experienced bank 
employees who do not know that the sav¬ 
ings, special or interest department, some¬ 
times called the investment department, is 
indeed a fertile field for pilfering by rea¬ 
son of its inactivity. Yet the possibility of 
an examiner detecting a defalcation in this 
department is quite remote, when systems 
common to a great many banks at present 
are employed. The writer has seen in¬ 
stances where banks have been systemat¬ 
ically robbed through this department, the 
specific thefts being large and frequent, 
covering periods of years, and still they 
were examined regularly by competent 
examiners. Although the examiners, in 
one case in mind, were unjustly compelled 
to shoulder a large part of the responsi¬ 
bility, the directors were compelled to 
make restitution and faced the possibility 
[ 65 ] 


BANK DEFALCATIONS 


of grand jury indictments for criminal 
negligence. I think I am conservative in 
stating that a large part of the money on 
deposit in state, national hanks and trust 
companies in this department, and even in 
some savings banks, is not properly safe¬ 
guarded. The money is protected from 
outside sources, of course, and it is prob¬ 
ably safe enough also in so far as the de¬ 
positor is concerned by reason of the di¬ 
rectors’ liability and the protection from 
surety companies, but the proper systems 
are not in use to eliminate the possibilities 
of a defalcation. Entirely too much de¬ 
pendence is placed on the honesty of small 
salaried employees. It is an easy matter 
for a director or even a depositor to deter¬ 
mine whether or not the proper system is 
in use in this department. If the pass book 
is returned to the customer directly by the 
teller handling the transaction, then “the 
door is wide open”; whereas if the pass 
book goes through other hands before 
[ 66 ] 


BANK DEFALCATIONS 

being returned to the customer, then it 
may safely be assumed that the proper 
precautions are being taken. There are 
a number of proper ways in which to con¬ 
duct this department and but one wrong 
way, and, peculiar as it may seem, this is 
the common way. The writer observed on 
a visit to a large institution, which is con¬ 
sidered by its directors as being defalca¬ 
tion-proof, a system which was elaborate, 
inasmuch as drawing a network of precau¬ 
tions around honest employees, but the 
originator was evidently not familiar with 
the workings of a criminal mind. The 
book was passed back to the customer by 
the teller handling the transaction, but a 
young girl was employed to sit beside the 
teller and record all transactions, looking 
over his shoulder or alongside of him as 
she did so. The rest of this system was 
equally ridiculous in so far as preventing 
irregularities is concerned. There never 
has been a system devised and probably 
[ 67 ] 


BANK DEFALCATIONS 


never will be which is absolutely defalca¬ 
tion-proof, but when a teller hands a book 
directly back to a customer, without the 
book actually leaving that department 
first or going through other hands or hav¬ 
ing the entry which he made in that book 
recorded in some way, then it is safe to 
assume that no precautions whatever are 
in force. Many of the inmates of our 
penal institutions would be entertained if 
it were possible for them to read of the pre¬ 
cautionary methods in vogue by some of 
our banks. The general methods used by 
defaulters in this department are the 
withholding of deposit tickets, increasing 
the amounts of drafts made and forging 
the same, causing false entries to be made 
such as the misposting of credits, etc., all 
of which are explained briefly. 

By withholding deposit tickets the 
teller accepts a deposit, enters the same in 
the customer’s pass book in the regular 
way, and returns the book directly to the 
[ 68 ] 


BANK DEFALCATIONS 


customer. He does not, however, allow 
the deposit ticket to go through the regu¬ 
lar day’s work, but holds it out, seldom, 
if ever, destroying it, and abstracts a like 
amount of cash to offset, thereby having 
no trouble in his daily settlement and little 
chance of an immediate discovery. By 
continuing this practice he would eventu¬ 
ally run a defalcation up to a very large 
amount and could float this shortage by 
practicing substitution, that is, by grad¬ 
ually allowing the tickets held out to go 
through the work and hold out new tickets 
in their place. This would lessen the 
chances of the shortage being detected by 
a bookkeeper in case of a withdrawal. 

By increasing the amount of drafts a 
teller can simply raise a draft made out by 
a customer, or, where he makes the draft 
out himself, he can make it out for a 
greater amount than the customer wishes 
to draw. For instance, take the case of a 
depositor wishing to draw one hundred 
[ 69 ] 


BANK DEFALCATIONS 

dollars. A teller can make this draft for a 
thousand or raise the draft, if made by the 
customer, and allow the larger amount to 
go through the books of the bank. He 
would, of course, enter a withdrawal of 
one hundred dollars in the pass book of the 
customer and actually pay out one hun¬ 
dred dollars; the difference of nine hun¬ 
dred dollars would be abstracted and 
thereby show no difference in the day’s 
settlement. A defalcation caused in this 
way could also be floated along indefi¬ 
nitely by substitution. The forging of 
drafts needs no explanation. 

The causing of a false entry to be made 
in this department is sometimes practiced 
by an employee changing or putting down 
a number on a deposit ticket which would 
be the number of an account in which he 
was directly or indirectly interested. In¬ 
stead of holding out the deposit ticket, 
false entries are sometimes made by a 
bookkeeper over whom a teller has some 
[ 70 ] 


BANK DEFALCATIONS 

influence, or by a teller himself when he 
has access to the ledgers. Should an offi¬ 
cial of the bank just referred to read the 
foregoing paragraphs he would say that 
these things could not happen in his bank 
without collusion. The writer will not 
argue this point now, but refers the reader 
to a few words relating to so-called collu¬ 
sion in another section, and he may then 
draw his own conclusions. As stated be¬ 
fore, to place the proper protection around 
these funds and the surest known way to 
safeguard against a defalcation is to have 
the book leave the hands of a teller who is 
waiting upon the customer. The prefer¬ 
able way is to have the book not only leave 
the hands of the teller but also to leave his 
department entirely and be handed back 
to the customer by another clerk in an¬ 
other department. Then real criminal col¬ 
lusion is necessary for a defalcation. Some 
banks have the teller hand the book out to 
the bookkeeping department, and the 
[ 71 ] 


BANK DEFALCATIONS 

credit or debit, as the case may be, is 
posted in the ledgers directly from the 
book and the book handed back to the 
teller and then to the customer. At the 
end of the day the bookkeeper checks his 
postings with the credits and debits re¬ 
ceived from the cages. This method is 
quite safe and entails no extra help. An¬ 
other very good system is to pass the book 
from the teller’s cage to another depart¬ 
ment and have a clerk or one of the book¬ 
keepers enter on a sheet or machine the 
number of this book, the balance appear¬ 
ing thereon and the current transaction. 
The work received from the teller’s cage 
at the end of the day must agree with that 
appearing on the sheet or the machine, as 
should also the balances on the ledgers. 
The clerk handling this sheet or machine 
should he changed occasionally. An offi¬ 
cer could, without notice, look at this sheet 
or at the machine at the end of a day and 
[ 72 ] 


BANK DEFALCATIONS 


see for himself how it checks out. He 
would actually know before the teller had 
a chance to prove his cash just how much 
money that teller should account for. 
These two methods are, in the opinion of 
the writer, as near proof against defalca¬ 
tions as it is possible to attain. Further¬ 
more, these methods lessen the chances of 
dangerous clerical errors, unclaimed de¬ 
posits and possible law suits, as a continu¬ 
ous audit is always in progress. 

In the examination of this department 
directors or regular examiners should 
spend some time in comparing pass books 
as they come in with ledger balances. This 
is especially important in banks where the 
system is not similar to that which is here 
suggested as being safe. This is just as 
important as running up a total of these 
balances which shows the bank’s liability 
in this department. A clever defaulter 
ordinarily would not allow his shortage 
[ 73 ] 


BANK DEFALCATIONS 


to show in the form of an increased 
liability. 

New and unused pass books in this de¬ 
partment should be kept under restricted 
access and locked up with the actual cash 
upon the close of business. It must be re¬ 
membered that if these books are left 
around loose and not locked up at night 
they may easily fall into the hands of 
someone who might defraud another bank. 
Possibly the bank to whom they belonged 
would have to defend themselves against 
a suit for damages for not taking better 
care of their pass books. 

The use of cards for this department 
which is so common at the present time is, 
in the writer’s opinion, none too safe. 
Loose leaf ledgers with lock binders are 
preferable. The key to these binders, like¬ 
wise additional blank sheets, could be kept 
under the control of an auditior, as these 
are the little things that count in prevent¬ 
ing defalcations. 


[ 74 ] 


BANK DEFALCATIONS 


"The Kitty” 

The maintenance of what is commonly 
known as a “kitty” is as equally danger¬ 
ous to the bank as the practice of 
requiring clerks to make good short 
differences. For those who are not 
familiar with the term “kitty,” it 
may be described as a surplus fund of 
money not counted in the bank’s cash, 
usually kept in an envelope or box which 
does not appear in any way on the books 
or records of the bank. This fund is made 
up in part by various loose ends of money 
“picked up” around the tellers’ cages, but 
consists chiefly of “over” differences. The 
excuse for this fund is usually to have a 
reserve for short differences. It is some¬ 
times found that these “kitties” are kept 
with the knowledge of the officers, who 
seem to acquiesce in the practice. Little 
indeed is the knowledge of these officers as 
to how criminals are made. In some banks 
[ 75 ] 



BANK DEFALCATIONS 

the officers think they have this matter 
under control when they make rules limit¬ 
ing the amounts to go into the “kitty” and 
to use therefrom, or require the keeping of 
a side memorandum book showing the 
transactions in this fund. Such regu¬ 
lations might be of use to govern chil¬ 
dren, but for the ordinary bank teller, 
whose work trains him to be keen, they are 
ridiculous. It often happens that bank 
examiners will call the attention of officers 
to the existence of these “kitties,” and ex¬ 
plain the dangers attached thereto, only 
to have the advice entirely disregarded by 
the officers, who usually think it too small 
a matter to hold their attention. In some 
cases the “kitty” is not allowed to grow to 
large proportions, being credited to profit 
and loss when it does. This seldom hap¬ 
pens, however, as the amounts taken out to 
make good the differences, and possibly 
for other purposes, usually keep the “aver¬ 
age balance” small. Yet the total trans- 
[ 76 ] 


BANK DEFALCATIONS 


actions in the course of a year, if actually 
known, might cause alarm. 

Who knows, other than those actually 
handling the “kitty,” whether the receipts 
and disbursements are increasing or de¬ 
creasing, even if records are kept, which is 
seldom the case? What is the advantage 
of these side records if an employee wants 
to be dishonest? Upon inspection the 
amount of the “kitty” may not show any 
change; for example, on Monday the con¬ 
tents may be $10 and on the following 
Saturday still be $10, yet it may have 
contained $20 on Wednesday and had $10 
abstracted on Friday for a difference or 
some other purpose. Let us consider a 
teller of strong character—one who could 
resist any temptation and would not in¬ 
tentionally commit a wrong for any pur¬ 
pose. Suppose that he has a small bal¬ 
ance in the “kitty” and a legitimate short 
difference occurs which wipes out the bal¬ 
ance. He then feels he has no reserve with 
[ 77 ] 



BANK DEFALCATIONS 

which to offset the next shortage and is 
possibly due for a reprimand on the next 
occurrence. He then, of course, makes 
every effort to prevent another short dif¬ 
ference, but possibly he will not be quite 
so careful as to an over difference, as he 
has in mind the hope of building up a re¬ 
serve in the “kitty,” honestly, of course. 
Right here is where this strong character 
weakens. He shows an over difference 
and feels relieved, but does he make an 
honest effort to locate this difference and 
see that the proper person receives credit 
for the same ? He may or he may not, but 
from my observation I believe the chances 
are he will deposit this over difference in 
the “kitty” with no wrong intentions, as 
he feels that the rightful owner will prob¬ 
ably put in a claim and then he can make 
good from the “kitty”. What often hap¬ 
pens, however, is that the rightful owner 
never claims it; along comes another short 
difference and the reserve in the “kitty” is 
[ 78 ] 


BANK DEFALCATIONS 


again wiped out. This teller has, I believe, 
with no intent committed a moral, if not a 
legal, theft. Will not a continuance of 
this practice tend to lower his standards of 
honesty? I believe it will, and that sooner 
or later we may expect almost anything 
from one who started out as an honest 
man but became the victim of a dangerous 
custom. In some banks these “kitties” are 
not even locked up at night with the rest of 
the bank’s cash. I have seen cases where 
all employees, even the janitor, had access 
to this money and took full advantage of 
this opportunity. 

Consider for a moment a somewhat 
weaker character than the teller just re¬ 
ferred to—and there are many of this type 
employed in banks—a man working for a 
small salary and, in all likelihood, living 
beyond his means. He cannot stretch his 
salary from one pay day to another. On 
leaving the bank he discovers he is short of 
carfare or lunch money, and thereupon 
[ 79 ] 


BANK DEFALCATIONS 

“borrows from the kitty”. He later re¬ 
ceives his salary, from which, of course, he 
intended to make good his loan, but as no 
one saw him “borrow” from the “kitty” 
he sees no reason why he should put it 
back. Probably he knows others are “bor¬ 
rowing” in this way, or possibly feels it 
is not the bank’s money and he has as much 
right to it as the bank, or it may be he 
simply forgets to put it back. It is un¬ 
necessary for me to picture the result of a 
continuation of this procedure. The bank 
that permits the maintenance of a “kitty” 
under any circumstances, no matter how 
small, or how its use is regulated, has only 
itself to blame in the event of a defalca¬ 
tion, for the existence of a “kitty” has 
started many young men on the down¬ 
ward path. I have seen cases where the 
regular small expenses of a bank were 
paid out of the “kitty”. A case in mind is 
where a junior officer was too indolent to 
make out a charge ticket charging expense 
[ 80 ] 


BANK DEFALCATIONS 


account and simply paid small expenses 
out of the “kitty,” which required no book¬ 
keeping entry. The writer has been in¬ 
formed that some twenty-five years ago 
these “kitties” actually ran “wild” in some 
of the large New York City banks, that 
the employees divided “profits” at a regu¬ 
lar monthly dinner, which was also paid 
for by the “kitty”. Every loose dollar 
they could possibly secure honestly or 
otherwise was thrown into the “kitty”. 

The routine in most of the large New 
York City banks has been perfected to 
such an extent that it is doubtful if a 
“kitty” exists in any of these institutions 
today. Where “kitties” are tolerated at 
all, who knows to what extent they are 
manipulated? There is no doubt that 
much serious trouble has been directly 
traceable to “kitties”. It is often difficult 
for an examiner to detect the existence 
of a “kitty,” as the employees try to 
conceal it as far as possible, and 
[ 81 ] 


BANK DEFALCATIONS 


sometimes it is necessary to call it by 
several names and ask many questions be¬ 
fore the “kitty” is actually produced. This 
fact alone proves that even the employees 
themselves realize it is a practice that can 
be criticized and for that reason hesitate 
about admitting its existence. 

The proper way to adjust over and 
short differences is for a difference account 
to be carried on a general ledger. When a 
teller has a difference he should make out 
a charge or a credit ticket, as the case may 
be, to this difference account, which goes 
to the general ledger bookkeeper for post¬ 
ing. The bookkeeper should not post any 
difference ticket unless it bears the initials 
of an officer, and it should be the duty of a 
teller responsible for the difference, or in 
whose department it occurred, to present 
this ticket to the officer for his initial. In 
that way the officials will have a direct line 
on the kind of work their men are doing. 
Under this method all differences are re- 
[ 82 ] 


BANK DEFALCATIONS 


corded, and there is no cash around loose 
for tellers to manipulate. The procedure 
of a teller approaching one of the officials 
to have a ticket initialed which represented 
an error would have a tendency to make 
that teller more careful in the future, 
whereas a “kitty” never would. This pro¬ 
cedure should apply to all differences from 
one cent up. This may cause a little extra 
work, but an ultimate defalcation would 
cause much more. The custom of some 
banks to have a teller carry an over and 
short difference account in his daily settle¬ 
ment sheet can also be criticised, for this 
method is only slightly different from 
maintaining a “kitty”. 

Employees' Accounts 

No employee, either clerk or officer, 
should be permitted to maintain an ac¬ 
count in a bank in which he is employed, 
as this practice has also been the starting 
point of many defalcations. Arrange- 
[ 83 ] 


BANK DEFALCATIONS 


ments should be made by a director with 
some friendly institution to carry small 
personal accounts for his employees and 
reciprocate by offering the services of his 
bank in the same capacity. It would be 
advisable for a director to occasionally 
drop in at the other bank and inspect the 
paid vouchers on accounts of his employees. 
This practice could not justly be called an 
inquisitive one, as the purpose would be 
for the benefit of a public institution and 
even for the well being of the employees 
themselves. This is usually a good way 
of keeping in close personal touch with an 
employee’s private life, which, without 
doubt, has considerable bearing on the 
conduct of his position. Under no circum¬ 
stances should an officer or employee be 
permitted to draw checks on his institution 
without an account on the ledger. This is 
often done with the idea of meeting the 
check with cash when it comes in. It must 
be borne in mind that there are many dis- 
[ 84 ] 


BANK DEFALCATIONS 


honest ways of taking care of such checks. 
Sometimes they are met with cash, but 
oftentimes they are not. They may be 
charged to some customer’s account and 
then destroyed or extracted entirely, which 
would result in an unfound difference, or 
they may be carried in cash items until 
money or another means to offset them is 
obtained. When I say that no employee’s 
account should be carried by a bank in 
which he is employed, I have in mind cases 
where credits were deliberately misposted 
and amounts transferred from other ac¬ 
counts to that of the employee, etc. Fur¬ 
thermore, it opens the door for the credit¬ 
ing of various profits of the bank by 
officers to their own accounts, etc., which 
has often happened. The writer has 
known banks which would not permit em¬ 
ployees to carry accounts, yet they would 
allow them to draw checks for small bills, 
under the assumption that they were being 
properly taken care of with cash when 
[ 85 ] 


BANK DEFALCATIONS 

they came in. This assumption is not 
always correct. 

Unclaimed Deposits 

It occasionally happens, particularly 
in large and busy banks, that a deposit is 
taken in for an account which cannot be 
located on the ledger. The receiving of a 
deposit like this will often happen in a 
rush of business and is usually caused by 
the depositor sending some inexperienced 
person to the bank, who either goes to the 
wrong bank or puts his own name on the 
deposit ticket. The teller may not notice 
the name on the ticket if he is very busy, or 
he may not even know the names of all the 
customers, and, therefore, does not hesi¬ 
tate to accept a deposit bearing a name 
which is unfamiliar to him. The purpose 
in mentioning this matter is to warn banks 
against allowing deposits of this nature to 
be kept in the teller’s cage until someone 
claims them, which seems to be the usual 
[ 86 ] 


BANK DEFALCATIONS 


way banks have of handling funds of this 
nature. This is a bad practice, as money 
held aside in this way usually becomes a 
“kitty,” or it may disappear entirely. Any 
money which is held over or carried along 
without strings on it affords the opportu¬ 
nity to “borrow”. Deposits of this nature 
should be immediately credited to a sus¬ 
pense account on the general ledger, to be 
charged should a claim ever be made. 

Safe-Keeping of Customers ' Securities 

Most banks are burdened with the cus¬ 
tody of securities left with them for safe¬ 
keeping by customers who do not rent safe 
deposit boxes. This practice is one of the 
results of the war, as it was generally 
started during that period to care for Lib¬ 
erty bonds purchased by persons who 
owned no other securities, and, therefore, 
had no reason for renting a safe deposit 
box. In fact, it was an inducement of¬ 
fered by many banks to the public in order 
[ 87 ] 


BANK DEFALCATIONS 

to further the sale of Liberty bonds. Dur¬ 
ing the war emergency most banks suf¬ 
fered with the employment problem, and 
routine work just hobbled along as best it 
could. Business multiplied fast and the 
work of aiding the Government to finance 
the war was no small additional task. As 
these bonds poured into the banks for safe¬ 
keeping, various attempts at systems were 
installed to provide for them. Most of 
these systems were devised with no idea to 
what extent this class of business would 
reach, and during the rush of work, 
handled by inexperienced clerks, even these 
attempted systems were carelessly kept 
and often ignored. As the war period 
passed the public took advantage of this 
privilege of leaving securities at the bank 
for safe-keeping, and consequently it is 
common now to find not only Liberty 
bonds but every kind of security, even to 
jewelry, carried by banks in this depart¬ 
ment. In a very large percentage of the 
[ 88 ] 


BANK DEFALCATIONS 


banks it is impossible for an examiner to 
verify these securities, and in many cases 
it would be a waste of time to check the 
securities on hand against the bank 
records, because when these records were 
put in use the idea of a defalcation was 
apparently remote. 

It would not be advisable to go into 
detail along these lines, but it is enough to 
say that an examiner would encounter seri¬ 
ous difficulty in endeavoring to ascertain 
whether or not a discrepancy existed in 
this department as a result of past loose¬ 
ness. It is regrettable that no new system, 
however good, would be practically appli¬ 
cable to past transactions. Banks can only 
hope for the best in this regard and show 
that “it is never too late to mend” by nail¬ 
ing down this department from now on. 
Whatever system is installed it should be 
based on an inventory, taken immediately, 
of all securities on hand in this department. 
Stub records should be kept of all future 
[ 89 ] 


BANK DEFALCATIONS 


transactions and receipts given to cus¬ 
tomers should hear serial numbers corre¬ 
sponding with the numbers on the stubs. 
These securities should be kept under re¬ 
stricted access, and the same care taken of 
them that a bank usually takes of the secu¬ 
rities which it owns. It would be prefer¬ 
able to have these stub records in a bound 
book form so that an examiner would have 
a guide by means of which every outstand¬ 
ing or surrendered receipt could be taken 
into consideration. 

The writer believes that securities 
owned by customers and held by banks for 
safe-keeping are a direct liability of the 
custodian in spite of some arguments to 
the contrary. 

Cash Items 

The term “cash items” is applied to 
checks, charge tickets, memoranda, etc., 
for which cash has been taken or for which 
cash should be substituted or made good in 

[ 90 ] 



BANK DEFALCATIONS 


some other way. These items are actually 
held in suspense by means of having them 
counted for actual cash instead of being 
charged up to their proper places. These 
items should receive close scrutiny, for it 
will usually be found that they are “not 
good” or uncollectible and, therefore, car¬ 
ried along as cash for reasons which should 
not be accepted too readily. 

There are few defaulters, indeed, who 
have not “shuffled” the cash items during 
some stage of their career. 

Some of the large New York City 
banks have hard and fast rules against the 
carrying of any cash items whatever. 
Every item is charged to its proper place 
regardless of the consequence. 

Many of the smaller banks, particu¬ 
larly out-of-town institutions, could not 
hold strictly to a rule of this kind, but 
should insist upon a permanent record of 
these items being kept in a book for that 
[91 ] 


BANK DEFALCATIONS 


purpose. This record should be in a bound 
book, written in ink, with sufficient detail 
for an examiner to identify various items 
for months back. 

The majority of banks at present keep 
a daily record on a scrap of paper, show¬ 
ing amounts only, and destroy the same 
the following day. This custom furnishes 
many opportunities for a defaulter or 
even one who does not actually embezzle 
but just indulges occasionally in a 
“shady’’ transaction. 

Nail the opportunity down at once by 
demanding a permanent record of cash 
items and verify the total of these items 
with the total used on the daily settlement. 

Don'ts for Directors 

Without describing in detail any fur¬ 
ther opportunities existing in many banks, 
the writer suggests that the following 
“tips” under the heading of “Don’ts” be 
given some serious consideration. 

[ 92 ] 


BANK DEFALCATIONS 


These “don’ts” cover practically every 
form of a defalcation at some stage of its 
existence. If this advice is heeded and if 
rules and regulations based thereon are 
rigidly enforced by the directors, the pos¬ 
sibility of preventing involved defalcations 
will not be remote. 

DON’T lose an hour’s time in protect¬ 
ing your interest or savings department 
as herein suggested. 

DON’T permit the existence of what 
is known as a “kitty”. 

DON’T fail to safeguard securities 
left for safe-keeping by customers. This 
is a liability of yours. 

DON’T permit employees to carry ac¬ 
counts in the bank in which they are em¬ 
ployed and don’t, under any circum¬ 
stances, allow employees to draw checks on 
their own bank, when they have no ac¬ 
count. 

DON’T allow unclaimed deposits or 
other loose ends of money to lie around 
[ 93 ] 


BANK DEFALCATIONS 


tellers’ cages or the vault without some 
control on the books of the banks. 

DON’T permit trading on the stock 
market by either officers or employees for 
their own account. 

DON’T require tellers to make good 
short differences. Adjust them as sug¬ 
gested under heading of “kitty”. 

DON’T ignore the private life of your 
employees. 

DON’T fear being considered over- 
inquisitive. 

DON’T fail to pay your employees a 
living wage. 

DON’T neglect to watch the outside 
enterprises in which any officer or clerk 
might be interested. Many banks have 
been wrecked by this neglect. 

DON’T permit the promiscuous pay¬ 
ing against uncollected items unless ini¬ 
tialed by an officer who can be held ac¬ 
countable for any loss sustained in this 
way. 


[ 94 ] 


BANK DEFALCATIONS 

DON’T forget to watch the account of 
the man who stands chatting too long with 
tellers or the pest who is forever handing 
in cigars, etc. 

DON’T forget to inspect your ledgers 
for check kiting. 

DON’T allow officers or employees to 
make loans from their personal funds to 
customers. 

DON’T think you can use sharp prac¬ 
tices yourself without the youngest em¬ 
ployee in the bank knowing it. He may 
be looking up to you as an example, and 
copy your practice in a small way. 

DON’T think what happens behind 
closed doors in the directors’ room never 
leaks out, particularly the things that 
should not. Employees always seem to 
learn these things in a mysterious way. 

DON’T notify the executive officer of 
the bank when you are going to make an 
examination, and DON’T worry before 
you start as to how long it will take. Roll 

[ 95 ] 


BANK DEFALCATIONS 


up your sleeves and go to work. Tackle 
the job as though you were working for a 
living or else resign your position. 
DON’T forget the people who are de¬ 
pending upon you to protect their money. 

DON’T fail to learn all about the 
contents of any safe deposit box kept by 
officers. 

DON’T depend too much on official 
examination. Remember your own re¬ 
sponsibility as well as that of the exami¬ 
ner. 

DON’T think your bank is too small 
to adopt precautions. The writer knows 
of one bank like this which employed only 
one man. The bank later found all of their 
assets in the showcases of a jewelry store 
owned by this employee’s brother. 

DON’T accept explanations of irreg¬ 
ularities too readily, however plausible. 
Investigate fully. A case in mind is where 
a teller showed a shortage of $9,000, and 
with the help of a friendly customer made 
[ 96 ] 


BANK DEFALCATIONS 


this appear as an error. The directors be¬ 
lieved the story of this teller and customer 
and the matter was dropped. One year 
later this teller pleaded guilty to the em¬ 
bezzlement of approximately $200,000. 
At the time of the $9,000 irregularity there 
existed a shortage of approximately $100,- 
000 which he had well concealed. 

DON’T discharge a man on suspicion. 
Change his position or give him an oppor¬ 
tunity to seek other employment or keep 
him under close observation. Many 
man’s life has been ruined in this way. 
as fair to him as you expect him to be to 
the bank. 

DON’T fail to see that all paid notes 
are properly cancelled with a large stamp 
across the face and that all payments on 
account of notes are endorsed. 

DON’T fail to audit the receipt of in¬ 
terest on notes, mortgages, bonds, etc., and 
verify the principal in a few cases where 
[ 97 ] 



BANK DEFALCATIONS 

the latter appears unchanged for a con¬ 
siderable time. 

DON’T fail to verify the signature on 
large notes. 

DON’T fail to watch transactions with 
your bond houses. Some of these have 
been known to give concessions to officers. 

DON’T take an adding machine list 
for granted in your examination. Re-run 
this list yourself. Don't forget a total 
can be thrown in and still not print. 

DON’T let one man hold down two 
jobs. This is false economy. 

DON’T forget to change your book¬ 
keepers around occasionally. 

DON’T allow erasures on any books 
or records. Have mistakes crossed out, 
but let original entry stand. Erasures 
might cause your bank to lose a law suit 
and also allows your bookkeepers to get 
into bad habits. 

DON’T forget that deposits on check 
accounts can be held out and substituted 
[ 98 ] 


BANK DEFALCATIONS 


as well as those on savings accounts, so 
don't forget to look over your total deposit 
tickets on any given day and check up on 
the dates, handwriting, etc. 

DON’T forget to reconcile your ac¬ 
counts with correspondent banks occasion¬ 
ally. When the account verifies with ex¬ 
ceptions don’t drop the matter there, but 
see it entirely through these exceptions . 

DON’T allow the over-certification of 
an account and don’t allow one teller to 
handle the complete transaction regarding 
certified checks. Don’t forget he can ma¬ 
nipulate outstanding items. 

DON’T forget to have outstanding 
certified checks proved up monthly, have 
registers ruled off monthly and items that 
are out entered in red ink. Don’t forget 
to have certification register a hound hook. 
A numbering machine to stamp each num¬ 
ber on check and repeat same number in 
register is a good idea. 

DON’T allow tellers to carry cash 
[ 99 ] 


BANK DEFALCATIONS 


items. Charge everything to its proper 
place immediately and don’t allow tellers 
to carry checks or other items along in 
their cash for the accommodation of cus¬ 
tomers. Don’t allow clerks or tellers to 
carry memos for money advanced in their 
cash. Don’t forget that these tickets could 
be pulled out or destroyed and the same 
offset by an over difference at window. A 
teller could pilfer in this way without ac¬ 
tually going through the act of putting 
money in his pocket. 

DON’T allow a teller to make 
“change” for himself or cash a check for 
himself. Don’t forget he can deliberately 
make a “mistake” in his favor. If a teller 
is observed moving his hands from his 
pockets to the cash drawer or vice versa, 
question the act immediately. This is too 
frequently ignored. Tellers have been 
known to carry a book which they were 
reading into the cage and take the same 
away with them nights, while during the 
[ 100] 


BANK DEFALCATIONS 


course of the day paper money was slipped 
between the pages. 

DON’T permit officers or employees 
to keep envelopes, boxes or other contain¬ 
ers with personal property therein in same 
compartments with assets of the bank. 

DON’T allow securities that have been 
used for collateral purposes to lie around 
loose or repose in collateral loan files after 
loans have been paid. These securities 
should be transferred to the safe-keeping 
department when not surrendered to cus¬ 
tomers upon payment of loans, even 
though the customer may be expected to 
make a new loan and use the same col¬ 
lateral. 

One of the most important DON’TS 
for an officer is: 

DON’T make any statements to an 
examiner which are not strictly in accord¬ 
ance with facts. 

These “don’ts” do not by any means 
comprise the entire duties of directors. 
[ 101 ] 


BANK DEFALCATIONS 


They are merely pertinent in the matter of 
preventing defalcations. There are a 
number of books published pertaining to 
directors’ duties, how to examine a bank, 
etc. These volumes should be referred to 
for further information. 

When Desire and Opportunity Meet 

The writer will not attempt to describe 
all the swift happenings upon the “break” 
of a defalcation, or the feelings of those 
who are directly or indirectly involved, but 
will say a few words on this matter for the 
benefit of those who lack the necessary im¬ 
agination. 

Some small irregularity may by chance 
or otherwise present itself. Then the pos¬ 
sibility of real trouble looms up. An ar¬ 
rest is made, the newspapers carry head¬ 
lines, heavy withdrawals are made, then 
possibly another arrest with more with¬ 
drawals and more headlines. Each day 
upon investigation the defalcation grows. 

[ 102 ] 


I 


BANK DEFALCATIONS 

Now the directors are fully awake; they 
have visions of a complete crash, the loss of 
much money personally, courtroom scenes 
and trials, the loss of friends and the never- 
ending publicity. Possibly some of these 
directors might actually picture them¬ 
selves behind prison bars. They are really 
staring ruination in the face, perhaps for 
the first time in their lives. The mental 
torture to those interested at the first 
break of a large defalcation must be hard 
to endure. Should the defalcation prove 
to be a small one, the visions of ruination 
would, in all probability, remain visions. 
If, on the other hand, the shortage as¬ 
sumed considerable proportions, suffi¬ 
ciently large, for example, to impair the 
capital and make necessary the closing of 
the institution, then these visions would 
become stern realities. Let not the 
director, who thinks himself a “big” 
man with money, friends and influence, 
smile at this picture, for he may little real- 
[ 103 ] 


BANK DEFALCATIONS 


ize how easily he may be placed in this very 
position with nothing visionary about it. 

I will cite one instance to show the 
narrow escape of some bank directors. A 
certain bank carried a blanket bond for 
$100,000; a defalcation occurred, which, 
after investigation proved to reach the ex¬ 
tent of over $300,000. In just twelve 
hours’ time one of our well-known surety 
companies presented their check for 
$100,000, with practically no questions 
asked. The matter ran along for a few 
days when the surpervising authorities, 
realizing the precarious condition of the 
bank, demanded that the directors make 
good the remainder of the shortage. These 
men were the ordinary type of bank direc¬ 
tors—intelligent, successful in their own 
business and were not only reputed to be 
wealthy but were what is generally known 
as rich men. They presented a pitiful 
sight in their feverish efforts to raise a 
large amount of cash. Their friends ran 

[ 104 ] 


BANK DEFALCATIONS 

for cover, their own assets were not liquid, 
and their influence was worthless at a time 
like this. The supervising authorities lim¬ 
ited these directors to forty-eight hours in 
which to raise the amount of cash under 
threat of closing the institution. One at 
a time they “threw up their hands” like so 
many helpless children, but fortunately for 
them all the extremely wealthy family of 
one of them came to their rescue and as¬ 
sisted in supplying the required amount. 
How many of our bank directors have 
these wealthy families behind them? They 
themselves are more often the wealthy 
member of their particular family. The 
authorities were not “bluffing” in their 
threat to close this institution, for they 
were playing safe themselves. To have 
permitted this bank to remain open in its 
dangerous condition would have cost these 
men their jobs at least, let alone the con¬ 
demnation of the public. If the money 
had not been raised in the required time 
[ 105 ] 


BANK DEFALCATIONS 


and the institution was closed, a great loss 
would have resulted thereby to thousands 
of poor people, and prosecutions many 
and swift would have been demanded by 
the public. To the writer’s personal 
knowledge the prosecuting authorities 
would have had little difficulty in involving 
criminally every individual director in this 
institution. These men could have at least 
been indicted and compelled to stand trial. 
Possibly there would not have been con¬ 
victions in the case of each and every di¬ 
rector, but who can tell what a trial jury 
will do ? The chances are that in a flagrant 
case of this kind where public sentiment 
demands punishment, a jury might con¬ 
vict on general principles. Suppose, under 
these circumstances, a man does succeed in 
obtaining an acquittal; he is branded for 
the rest of his life as having just barely 
escaped prison. 

I hope I have made it plain that it is 
quite possible for an honest and conscien- 
[ 106 ] 


BANK DEFALCATIONS 


tious bank director to arise some morning 
and find himself in a very difficult position. 

The Purpose of Official Examinations 

All banks are subject to some official 
supervision and are accordingly examined 
from time to time by either the national or 
state bank examiners. The public and 
even the directors of many of these insti¬ 
tutions do not fully realize that the duties 
and procedure of these examiners are 
clearly defined for them by the authorities 
and that they are primarily to make exam¬ 
ination as to the solvency of the bank. 
While there seems to be no hard and fast 
rule governing the time spent in each in¬ 
stitution, the circumstances usually re¬ 
quire an examiner to move on to his next 
assignment as soon as he ascertains the 
true condition of the bank. 

The possibility of an examiner detect¬ 
ing a defalcation is quite remote unless 
the general atmosphere of the bank arouses 
[ 107 ] 


BANK DEFALCATIONS 

his suspicion or unless he discovers some 
irregularity during the course of his exam¬ 
ination. Doubtless there is a sigh of relief 
on the part of most bank directors upon 
the conclusion of any official examination 
and a general feeling that all is well. 
These directors are not only self satisfied 
but their confidence in the officers and em¬ 
ployees is automatically strengthened, yet 
how often is this confidence misplaced. 
There are many bank directors who do not 
fully realize the responsibility, and I might 
add, with emphasis, the liability of acting 
in this capacity. I have in mind the very 
large percentage of directors who have ar¬ 
rived at the graduation class in some other 
line of business and know little or nothing 
about real banking practice. They have 
aspired to be classed as bankers in their re¬ 
spective communities and naturally when 
the opportunity to serve on a bank direc¬ 
torate presents itself they grasp it blindly, 
bul always with their confidence in official 
[ 108 ] 


BANK DEFALCATIONS 


supervision uppermost in mind. These 
directors do not realize that the possibil¬ 
ity of a defalcation should always be in 
mind. Directors often disapprove of some 
improvement in the routine of the bank, or 
some suggestions made by a well meaning 
officer or examiner simply because it may 
involve some additional expense. They 
feel that everything has been all right in 
the past and that the chances are it will 
continue to be so. I do not profess to 
know what is in the minds of these men 
when they take this attitude, but I assume 
they are relying on the regular official ex¬ 
aminations to detect any irregularity be¬ 
fore it reaches dangerous proportions. 

Bank directors do not stop to think 
that most of the examiner’s attention is 
taken up along other lines, and that usu¬ 
ally a defaulter, being at least of ordinary 
intelligence, has taken the preliminary 
trouble of matching his wits against those 
of the examiner, and consequently will 
[ 109 ] 


BANK DEFALCATIONS 


cover his tracks as far as possible. It is 
usually the chance mistake that the de¬ 
faulter will make which leads to his dis¬ 
covery. 

The confidence displayed by the pub¬ 
lic in our financial institutions is based in 
the first place on the official supervision 
governing these institutions, and secondly, 
on the reliability of the men composing 
the directorate. Regarding the possibility 
of a defalcation both the public and the 
directors rely on the official examinations, 
notwithstanding the fact that the discov¬ 
ery of a defalcation is only a secondary 
purpose of the examiner and not in a 
direct line with his duties. The public can 
be excused in this misconception, but the 
director never. It is his duty to conduct 
the business which he is supervising in a 
manner which will reduce to a minimum 
the possibilities of an embezzlement re¬ 
gardless of expense, and to know as a re¬ 
sult of his own investigation that no irreg- 
[ 110 ] 


BANK DEFALCATIONS 


ularity exists. This would be difficult in 
the case of a director who had spent most 
of his life in some other line of business, 
and these things should be considered by 
a man who seeks to become a bank director. 

Bank directorates cannot be composed 
entirely of bankers, as the management 
would not be well balanced. It, therefore, 
behooves the layman to make every effort 
to educate himself to the duties of his po¬ 
sition and to always have in mind the pos¬ 
sibility of a defalcation. Unless this un¬ 
pleasant thought becomes a subconscious 
worry he is apt to be more or less care¬ 
less concerning the adoption of preventive 
measures and may become overconfident, 
through close association, in those whose 
moves should be scrutinized. Without 
this thought in mind he may not grasp the 
real importance of suggestions made by 
examiners who, through necessity, may be 
more or less conservative in their state¬ 
ments. 


[in] 


BANK DEFALCATIONS 

The reader will, no doubt, ask why it is 
not made the duty of examiners to also 
look for defalcations as well as to the sol¬ 
vency of a bank. I answer this question 
by stating that the act of ferreting out 
well concealed defalcations might take 
weeks or even months. It would entail 
considerable expense, and everyone in the 
bank would have to be under suspicion 
and gradually exonerated by the process 
of elimination. The examiner would have 
to delve into the private life and personal 
affairs of all officers and employees, in ad¬ 
dition to doing much auditing work which 
might show no results. This process 
would undoubtedly be resented by banks 
and their employees where no irregulari¬ 
ties existed, which, fortunately, is the case 
in the very large majority of banks. Such 
procedure would cause conflict between 
the banks and their supervisors and it is 
quite essential that harmony as far as pos¬ 
sible should exist between the banks and 
[ 112 ] 



BANK DEFALCATIONS 


the supervising authorities. Would it not 
be better to forestall the possibility of a 
defalcation than to have examiners or any¬ 
one else hunt for one which may or may 
not have occurred. From the foregoing it 
would seem like a difficult problem con¬ 
fronting bank directors, and the quicker 
these men realize their difficult positions 
the better. They should adopt all modern 
systems and preventive measures now in 
use as far as possible, and instantly stop 
practices, however small, which are known 
to be dangerous. Methods running along 
in the same old rut, if not safe, should be 
corrected at once, as the peaceful past is 
no guarantee for the future. Suggestions 
made by bank examiners should, at least, 
be given serious consideration and not 
passed over lightly or totally disregarded, 
as is often the case. 

Many bank officers and directors are 
too ready to feel that examiners are un¬ 
duly particular in criticising small techni- 
[ 113 ] 


BANK DEFALCATIONS 


cal irregularities, but the old adage of 
“mighty oaks from little acorns grow” is 
indeed applicable to banking procedure. 

The Value of Directors' Examinations 

With very few exceptions most exami¬ 
nations conducted by the directors them¬ 
selves might properly be considered jokes. 
The writer has, on many occasions, heard 
the executive officers laugh and joke about 
these examinations, and pass it off by say¬ 
ing they were only made to comply with 
the law. In many cases the examining 
committee of the directors actually con¬ 
sult with the officers as to the time it 
would be convenient to make an examina¬ 
tion. Often these directors will ask the 
officers as to how to proceed and how long 
this or that job will take, etc. As far as 
defalcations or the prevention thereof is 
concerned these examinations are truly 
worthless when conducted by the directors 
themselves. 


[ 114 ] 


BANK DEFALCATIONS 


Let us consider banks in which the di¬ 
rectors employ accounting firms to make 
these examinations for them. These ex¬ 
aminations are, of course, very much more 
efficient and beneficial to the institution, 
but the accountants are usually instructed 
just what to do when they are employed. 
They are not usually given carte blanche 
to dig into the vitals of the bank nor are 
they instructed to search for defalcations. 
Many of these men, although expert ac¬ 
countants and auditors, are not familiar 
with the workings of a criminal mind. 
They are experienced in constructive ac¬ 
counting and take the books and records 
as they find them. Books and records 
cannot always be taken for their face 
value when hunting for a defalcation. 
Many accountants and official examiners 
would not be able to discriminate between 
a wilful false entry and a mere clerical 
error. Examinations, whether official or 
by public accountants, cannot be de- 

[ 115 ] 


BANK DEFALCATIONS 

pended upon to unearth defalcations. The 
moral effect, however, on the employees 
does aid in prevention. Directors’ exam¬ 
inations, when conducted by themselves, 
usually fall short of even having a moral 
effect on the employees. 

What Kind of a Banker Are You? 

Three large banks of equal size were 
visited consecutively by an investigator, 
who noticed that in each of these institu¬ 
tions the same opportunity for a defalca¬ 
tion existed. This condition was pointed 
out to the presidents of these banks with 
the following results: 

The president of the first bank has and 
deserves the reputation of being a good 
banker. He is what is commonly known 
as a “live wire”. He made the statement 
that he would correct the condition called 
to his attention immediately, even if it be¬ 
came necessary for him to reconstruct his 
entire banking floor. 

[ 116 ] 


BANK DEFALCATIONS 


The president of the second bank vis¬ 
ited said: “Oh, let the surety company 
worry about that.” This man was in¬ 
formed that a loss might run over the 
amount of his blanket bond and the di¬ 
rectors would be compelled to make good. 
He replied to this suggestion by stating 
that he would have his blanket bond in¬ 
creased immediately. This man stands out 
as one of the leading citizens in his com¬ 
munity, looked up to and respected by 
almost every one. His true colors, how¬ 
ever, show that he does not deserve the 
reputation which he enjoys. He is the 
type who is helping to maintain high rates 
on surety bonds and packing the penal 
institutions to the doors. This is not a 
rare instance, as there are many others 
who show a similar attitude, although not 
quite so frank. 

The third bank was presided over by a 
staunch but narrow-minded churchman. 
He believed in employing only those who 
[ 117 ] 


BANK DEFALCATIONS 


were members of his church, regardless of 
their habits, ability or character. He 
took the attitude that if his employees 
were members of the same religious de¬ 
nomination they were not only honest men 
now but would remain that way. Just 
imagine this person in full charge of a 
$10,000,000 bank. It was indeed difficult 
to reason with this man. He simply would 
not see the danger explained to him, but 
continually fenced for reasons why he 
should not correct this condition. His 
arguments were so weak they are not 
worthy of mention, but they indicated 
that he was just as selfish and stubborn as 
he was religious. 

Religion is one of the mainstays of the 
world and we could not go far without it. 
We should understand, however, that re¬ 
ligion will thrive better outside of the mod¬ 
ern business house and that its aid in pre¬ 
venting bank defalcations in the past has 
been insignificant. 


[ 118 ] 



BANK DEFALCATIONS 


At this time it would be appropriate 
to mention the president of another insti¬ 
tution who takes the attitude that a de¬ 
falcation in his bank is impossible because 
he “looks up the references of his em¬ 
ployees with great care”. Just think of 
this man occupying the president’s chair 
with a partially developed mind. The 
proper place for this paragraph would be 
in a comedy on bank defalcations, if such 
a thing were possible. To repeat a phrase 
used elsewhere in this book, he does not 
know that “the bank defaulter is usually 
an honest man who becomes a thief after 
he obtains employment in a bank”. 

It might be well to refer at this time 
also to an instance where a board of direc¬ 
tors gave a vote of confidence to an em¬ 
ployee, retained him in his position and 
even aided him in many ways to escape 
prosecution when he was caught “hands 
down” in a flagrant irregularity. This is 
not a very unusual happening. The writer 
[ 119 ] 


BANK DEFALCATIONS 


knows of three specific cases in three 
widely separated parts of the country sim¬ 
ilar to the instance just mentioned and has 
heard indirectly of others. Actions of this 
kind may take place in a spirit of defiance 
to the examiners and other public officials, 
or possibly because of some personal ties 
the person involved has with some member 
of the board. There are no words in our 
vocabulary strong enough to condemn 
such a procedure. 

Collusion Defined 

The word collusion is often misused 
by bankers, examiners and auditors, and, 
consequently, the statement containing 
the word is liable to be misinterpreted. In 
referring to a bank defalcation, the word 
collusion should be preceded by the word 
criminal, for it is possible for two or 
more persons to agree to do a thing 
or to collude or enter into a collu¬ 
sion to do something which is not 
[ 120 ] 


BANK DEFALCATIONS 

criminal. But with a theft intended it 
must be a criminal collusion or what is 
legally known as a conspiracy. Suppose 
an investigator or a bank auditor were to 
inform a bank directorate that a defalca¬ 
tion in their institution would be very un¬ 
likely owing to their systems, etc., without 
collusion. These directors would natur¬ 
ally assume that criminal collusion or con¬ 
spiracy was meant and would probably 
feel safe in the assumption that no two or 
more employees would actually get to¬ 
gether and agree or conspire to defraud 
the bank. Suppose, then, that a defalca¬ 
tion should occur engineered by one man 
and aided by another clerk or an outside 
party who had no intention of assisting in 
a theft or who had no knowledge of the 
other’s pilfering. The directors would say 
they were not informed that this was 
possible, and the investigator would cover 
himself by saying that this was what he 
has entirely too broad a meaning when it 
[ 121 ] 




BANK DEFALCATIONS 


is used in connection with the personnel of 
a bank. A case in point is that of a de¬ 
faulter, who covered his shortage by ma¬ 
nipulating customers’ pass books. He in¬ 
structed a very young clerk as to the 
necessary adjustments to be made in these 
books. The defaulter was older, held a 
higher position and was of a stronger per¬ 
sonality. He exercised his influence over 
the boy and was thereby rendered assist¬ 
ance which made it possible for him to 
cover his shortage for a long time. Could 
this be called “collusion”? Yes, but cer¬ 
tainly not criminal collusion or conspir¬ 
acy, and that is what is meant when the 
word is used in bank routine. This boy 
never dreamed of the result of his acts. 
Another case involved a girl bookkeeper, 
who was instructed to make false entries 
on her ledger by a teller who did not have 
meant by “collusion”. The word alone 
access to the ledger. This girl could not 
[ 122 ] 


BANK DEFALCATIONS 


think for herself and was too inexperienced 
to know that she was doing wrong. She 
actually covered the teller’s shortage for 
him, yet this could not be called criminal 
collusion. It must be remembered that a 
^ defaulter’s mind is always on the alert. 
He is thinking several paces ahead of the 
honest clerks around him. He is des¬ 
perate and will take all kinds of chances. 
His desperation will impress the inexperi¬ 
enced clerks around him as being strength 
of character, and the attitude that he thus 
assumes is capable of having many things 
done around the bank by unsuspecting 
young employees which would aid ma¬ 
terially in concealing his defalcations. 
Those responsible for rendering this aid 
under the circumstances could not be con¬ 
sidered a party to a collusion morally, al¬ 
though it would be a simple matter to 
legally connect them as aiders and abettors 
in a crime. 


[ 123 ] 


bank defalcations 

Illustrative Cases Disproving Common 
Opinions 

Some readers will feel that it would be 
difficult for an innocent man or rather a 
man with no criminal intent to actually be¬ 
come a principal in a defalcation and vio¬ 
late the banking laws flagrantly, and some 
will feel that they are competent to judge 
their employees in the matter of defalca¬ 
tions, taking into consideration their char¬ 
acter, habits, length of service, etc. For 
this reason the following cases are related 
which might cause some change of opinion. 

The first case will show how simple it 
is for a bank officer or employee to be¬ 
come involved in an irregularity, without 
criminal intent and against his own 
wishes. The fundamentals of this defalca¬ 
tion are quite common and have been the 
cause of many large and involved irregu¬ 
larities. The act of an officer becoming 
over-friendly with a customer and grant- 
[ 124 ] 


BANK DEFALCATIONS 

ing of many little favors forced the desire 
upon this officer. The incompetent board 
of directors, who knew nothing whatever 
of banking laws or routine and cared less, 
and their over-confidence in one man to¬ 
gether with many loose and dangerous cus¬ 
toms, furnished the opportunity. 

A small country bank was organized 
by reputable, wealthy and hard-headed 
farmers, and, as is often the case, a young 
man with very little banking experience, a 
former school teacher by profession, was 
appointed cashier. This young man was 
of high character, clean cut and a very 
likable fellow. He was married to a very 
fine girl from one of the old families in the 
community. This couple lived in quarters 
adjoining the bank and seemed to enjoy 
the slow and rather monotonous existence 
of living in a far-off country town. Their 
chief pastime was church on Sundays, 
with an occasional day’s fishing through 
the week, and during the long winter 
[ 125 ] 



BANK DEFALCATIONS 

evenings they would engage in a friendly 
game of cards at a neighbor’s home. This 
young man had not purchased a suit of 
clothes in three years, as he had no need to 
keep in style and could save money by ac¬ 
tually wearing out his old clothes. This 
couple was saving about 70 per cent, of 
their income, as their combined wants were 
few and expenses almost nothing. The 
cashier was, of course, anxious to build up 
the business and get as many new accounts 
as possible. With this end in view he vis¬ 
ited an adjoining town to look up an ac¬ 
quaintance of his who had just started in 
business. This acquaintance was a clean- 
cut young man, shrewd and probably 
honest at heart, but one who would stop at 
nothing which he considered legitimate to 
further his own ends. This friend was a 
very much better business man than the 
cashier was a banker. He was looking for 
a bank to do business with, particularly 
one in which he might obtain accommoda- 
[ 126 ] 


BANK DEFALCATIONS 

tion through his acquaintance. There¬ 
fore the securing of this new account was 
easy. 

In a very short space of time things 
began to boom for this young business 
man and he was pinched for working capi¬ 
tal. He did not have sufficient funds to 
pay a certain draft for a carload of mer¬ 
chandise shipped to him, yet he needed 
these goods to supply his trade. He there¬ 
upon persuaded his friend, the cashier, to 
loan him on the bill of lading so that he 
could get the merchandise, promising that 
he would realize on the same immediately 
and then pay the draft. The cashier was 
anxious to hold this man’s account, think¬ 
ing it would eventually be a large one, and 
he also wanted to accommodate him as 
much as possible because of their friend¬ 
ship. He thought he was not taking a 
very great chance by complying with his 
friend’s request. However, this draft was 
never entirely paid. The business man 
[ 127 ] 


BANK DEFALCATIONS 

claimed he had to sell some of the mer- 
chanise on time payments and made other 
excuses, so that consequently the cashier 
had to make him a loan to cover the de¬ 
ficiency. Business grew in leaps and 
bounds for the young business man, and 
just as rapidly his working capital was 
being tied up. He would insist upon fur¬ 
ther accommodations in the form of loans 
and other favors which he did not consider 
illegitimate, but were nevertheless de¬ 
manded under the pretext that he might 
“fail” if they were not granted in which 
case the greater part, if not all, of the 
loans already procured would remain un¬ 
paid. In the beginning the cashier did not 
want to see his friend fail, as the bank 
would lose a customer and the small 
amounts then owing. Consequently he 
kept on accommodating him, thinking each 
time would be the last and that some of 
the proceeds from his enormous sales 
would soon be used to liquidate his in- 
[ 128 ] 


BANK DEFALCATIONS 

debtedness. However, the proceeds were 
used in the expansion of the business, and 
the bank was not only forced to wait but 
to keep on advancing under threat of los¬ 
ing what they had already advanced. 
When the amounts loaned in the regular 
manner began to exceed the limit pre¬ 
scribed by law, the cashier felt that he 
was forced to make false entries, false re¬ 
ports to the authorities, conceal evidence 
of additional loans, and manipulate other 
accounts to the advantage of his friend’s 
account. In fact, he flagrantly violated 
the law in every possible way to conceal 
the large amount which his friend was 
using to finance his business. The visit of 
a bank examiner and the subsequent arrest 
of both men was the outcome of this sit¬ 
uation, fortunately in time to save the 
bank. This small country bank was com¬ 
pelled to stagger along with a loss of ap¬ 
proximately $50,000. The closest investi¬ 
gation did not reveal how the bank cashier 
[ 129 ] 


BANK DEFALCATIONS 


profited personally in any way, but he was 
certainly criminally negligent, being igno¬ 
rant of banking practices and having ig¬ 
nored the banking laws entirely. The di¬ 
rectors were so confident of this young 
man’s ability that they paid no attention 
to matters that he brought before them at 
meetings, but were more apt to talk about 
automobiles or crops. Banking laws, 
banking routine and general business 
practices were absolutely foreign to them. 
Strange as it may seem, the writer believes 
that the customer in this case, or, legally 
speaking, the aider or abettor, likewise had 
no criminal intent of injuring or defraud¬ 
ing this bank. Surely there was no crimi¬ 
nal collusion between them. 

Probably some bankers who may 
chance to read this book will look over his 
employees and say to himself that “there is 
not a man in my organization in whom I 
have not the fullest confidence.” This is a 
pleasant way for him to feel, but rather 
[ 130 ] 



BANK DEFALCATIONS 


dangerous for himself and for the public 
who have money in his bank. Will he be 
able to feel the same way six months from 
now ? The longer one deals with bank de¬ 
faulters, the harder it is to discriminate by 
merely looking over the men or being ac¬ 
quainted with them. The guilty ones are 
usually the ones whom we would least 
suspect. 

A strange case is that of a young man 
who defaulted to satisfy the ambitions of 
his mother, a very fine old lady. This 
case occurred in a bank in a large city, 
and the young man had advanced himself 
to the position of a junior officer. No de¬ 
falcation was known to exist in this bank 
and not the slightest irregularity had ever 
been found, although the examiners had 
made very careful examinations at irregu¬ 
lar intervals. This young man was a 
member of a very highly respected family, 
enjoyed the confidence of a host of friends, 
and was engaged to marry a young lady of 
[ 131 ] 


BANK DEFALCATIONS 


high standing. After a thorough investi¬ 
gation it was established that he had no 
bad personal habits of any kind. He did 
not even smoke, associated with the very 
best people, spent his evenings at home 
reading, used the best language, and, in 
fact, he appeared to be a gentleman in 
every sense of the word. His manner was 
genteel, he was clean cut and good to look 
at and, all around, a fellow whom you 
could not help liking. In conversation he 
was direct and interesting and always 
looked his audience unflinchingly in the 
eye. 

During an investigation of certain 
criminal acts in another bank in which this 
young man was in no way connected, the 
inference was drawn that possibly the 
young man referred to was interested in 
the stock market, and with this idea in 
mind he was requested to present himself 
for an interview by authorities who were 
investigating the irregularities at the other 
[ 132 ] 





BANK DEFALCATIONS 

bank. During this interview the young 
man’s personality was, of course, entirely 
disregarded, and many pointed and per¬ 
sonal questions were put to him in rapid 
succession. He answered every question, 
carefully retaining his composure. He 
stood up well under what was really an 
unwarranted grilling. A little nervous¬ 
ness was noted, but this was to be expected 
under the circumstances. The interview 
ended with the investigators gaining noth¬ 
ing except having made an impression on 
the young man from their questions that 
they knew a great deal more about him 
than they really did, but as a matter of 
fact they only knew what he had told them. 
These investigators then communicated 
with the chief bank examiner and sug¬ 
gested that he make an early examination 
of the bank with which this man was con¬ 
nected. Consequently, the next day in¬ 
stead of the usual two examiners appear¬ 
ing on the scene, four walked into this 
[ 133 ] 


BANK DEFALCATIONS 


bank. Had this young man kept his nerve 
he would have been free today, for he con¬ 
cealed his defalcations cleverly for a long 
time. With his grilling of the previous 
day fresh in mind, followed by the ap¬ 
pearance of a double force of examiners, 
he weakened and before the examination 
started confessed to the misappropriation 
of approximately $50,000. After his ar¬ 
rest he told the writer that the only motive 
he had was to become rich and principally 
for his mother’s sake, as she was continu¬ 
ally spurring him on to get ahead in life 
and make more money, never dreaming, 
of course, that he would deviate from the 
straight and narrow path. He claimed 
that he had worked so hard in the bank 
day and night to advance himself that he 
had become run down physically, and that 
he was only tempted to use the bank’s 
money to finance himself in Wall Street 
through his weakened condition. Of 
course, a defaulter always has an excuse, 

[ 134 ] 


BANK DEFALCATIONS 


and this should, therefore, be taken for 
what it is worth. However, I believe that 
this case will tend to show that a man’s 
personality, habits and character are no 
proof against defalcation. 

Another unusual case is that of a man 
over 70 years of age who had served 50 
years of his life with one institution, and 
after all these years of service com¬ 
menced to steal. Upon investigation it 
was found that this old man had no bad 
habits, was not a spendthrift, but simply 
used the money which he stole to pay his 
regular expenses—grocers, doctors, medi¬ 
cines, etc.—as his salary had not kept 
pace with the increased cost of living. 
This case occurred in a small out-of-town 
bank where the entire working force con¬ 
sisted of the old man just referred to and 
a young girl. This young girl was also 
stealing and using the money to buy such 
luxuries as many young girls dream of. 
This unusual combination of defaulters 
[ 135 ] 


BANK DEFALCATIONS 


was stealing individually with no criminal 
collusion between them. Whether either 
had knowledge of the other’s pilfering or 
not it would be hard to say. 

Bank defalcations seem to be on a par 
with some physical diseases from which no 
one is immune. 

What to Do in the Event of a Defalcation 

Most bankers would know what to do 
in the case of a defalcation when the man 
responsible makes his departure. This 
man has relieved the directors of the task 
of fixing the responsibility. The directors 
would then go through the necessary legal 
procedure, notify the surety company, 
have an audit made, and possibly they 
would then adopt some means of prevent¬ 
ing a repetition of this particular kind of 
a defalcation. 

The most difficult cases, however, are 
those where the guilty person does not de¬ 
part and does not acknowledge his com- 

[ 136] 


BANK DEFALCATIONS 


plicity by any unusual action, but remains 
at his post to see what happens and to pro¬ 
tect himself to the last straw. These cases, 
particularly where the actual cash is stolen 
and where the most exhaustive audit will 
not reveal the guilty party but simply the 
amount of the theft, must be worked on by 
means of interrogation. Interrogation in 
itself will mean nothing unless properly 
handled, and the writer suggests a method 
which has proven successful. 

Before any employee is questioned the 
directors should learn personally or 
through hired investigators as much as 
possible about the private life and habits 
of each employee. This information 
should not be in the form of gossip or 
hearsay, but should be facts in writing. 
These facts should not be obtained from 
fellow employees, but from outside 
sources, and should relate to any other in¬ 
come the employee might have, his bank 
account, paid vouchers, his friends, clubs, 
[ 137 ] 


BANK DEFALCATIONS 


how most of his spare time is employed, 
his home life, and approximately what it 
is costing him to maintain his home, etc., 
and his movements just prior to the break 
of the defalcation in particular. Up to 
this time the defalcation should not be dis¬ 
cussed in any way with the employees. 
Armed with these facts at least three di¬ 
rectors should take their places in the di¬ 
rectors’ room and call in one employee at 
a time. Have him occupy a chair directly 
facing the directors with plenty of light on 
his face and begin to question him in a 
very quiet and friendly way. These ques¬ 
tions should be founded on his life at a 
time years before his employment, and 
very gradually lead up to the present 
time. The interrogator should gradu¬ 
ally become more and more aggressive 
and not say “did you do such and such 
a thing,” but say “you did such and such 
a thing” and “why did you do it”. He will 
deny it quick enough if he did not do it. 

[ 138 ] 



BANK DEFALCATIONS 

These tactics will take a man off his guard, 
for he will not know just how much you 
know about him. Veil your questions so 
he may have a choice of answers. Do not 
be afraid of hurting his feelings, for at a 
time like this it is often necessary to em¬ 
barrass the innocent to find the guilty. 
Repeat many of your questions reframed, 
giving him the opportunity to contradict 
himself. In fact, suggest answers with 
your questions which would be contradic¬ 
tions to statements already made. The 
quicker he gets angry the better, as he is 
then off his guard. The interrogator 
should also pretend to get angry. Re¬ 
member, one of the chief purposes of this 
interrogation is to trap your man in a 
downright he. Do not pretend to notice 
this lie at the time, but go through this 
formality with each man who might pos¬ 
sibly be involved. This interrogation 
should be done all in the one day and night 
so as not to give those already questioned 
[ 139 ] 


BANK DEFALCATIONS 


an opportunity to prepare others yet to 
come. Every word, both questions and 
answers, spoken in this room should be re¬ 
corded by a stenographer and preferably 
one who is concealed if possible. If un¬ 
true statements have not already been 
noted in the course of these interviews, 
study the stenographic notes and re¬ 
examine the man who has contradicted 
himself. Remember, your defaulter is also 
a liar; they have never been known to be 
otherwise, and it is up to you to trap him 
in a he, for it is far easier to catch him 
lying than defaulting. Assuming that 
your interrogation has been successful in 
producing one who has told an untruth or 
flatly contradicted himself, this man 
should be brought back into the room after 
all the others for re-examination. Remem¬ 
ber, this man has sacrificed his chances of 
any consideration by lying and he should 
now be hammered with questions right 
and left. Go at him tooth and nail, keep 
[ 140 ] 




BANK DEFALCATIONS 

up a rapid fire of questions* repeating, if 
necessary, your previous question over 
and over again. If he becomes belligerent 
you are on the right track and you should 
assume the same attitude. Above all 
things, forget time; keep at him all night, 
if necessary; forget your dinner; if you are 
growing tired and weak, remember that he 
must be twice as much so, and every hour 
that the interrogation continues he is 
growing more and more weak. Guilty 
knowledge or an admission is what you are 
after, and it usually comes before morning. 

Plain Talk in Conclusion 

With disturbing frequency articles on 
bank defalcations are appearing in the 
daily newspapers. Many readers dismiss 
these matters from mind, sometimes with 
the casual comment of “ another good man 
gone wrong”. 

There is no reason for the layman to 
give these accounts any serious considera- 
[ 141 J 


BANK DEFALCATIONS 

tion, as they are more or less unfamiliar 
with the routine “behind the scenes” in 
banks and naturally feel that defalcations 
occur because they cannot be prevented. 

The public does not know that many 
of these unfortunate situations, in fact, a 
great many of them, possibly more than 
half, could easily have been prevented if 
there had been at least one director on the 
boards of these banks who was “up to his 
job”. 

When directors acquiesce in the exist¬ 
ence of conditions which permit of the op¬ 
portunity to default, they are not only 
placing themselves legally liable, but they 
are giving aid and encouragement to the 
defaulter, thereby becoming moral parties 
to the crime. A very large number of our 
banks might be considered fertile fields for 
pilfering. It is not a difficult matter to 
find a bank where conditions are so loose 
that they actually invite a defalcation. 

[ 142 ] 


BANK DEFALCATIONS 

Directors should remember than an as¬ 
surance from officers will not prevent em¬ 
bezzlements. It is their duty to know, as a 
result of their own investigations, that 
every known precaution is made use of. 
Beware of the officer who scoffs at preven¬ 
tive measures suggested by bank exami¬ 
ners by saying there never has been any 
trouble, so why anticipate it ? 

Directors should not allow overbearing 
and the know-it-all type of officer to bluff 
them out of doing their duty. This offi¬ 
cer may have something to conceal himself. 
It is almost amusing for one of experience 
to discuss the matter of defalcations with 
the type of bank officer just referred to, 
and there are many of them. Many of 
these men have never seen a defaulter nor 
have they ever been an interested party in 
a defalcation. They have no conception 
of how the criminal mind develops. In 
fact, they know absolutely nothing about 
an embezzler or his methods. It is almost 
[ 143 ] 




BANK DEFALCATIONS 


impossible to reason with some of these 
men when pointing out conditions in their 
institutions which usually supersede defal¬ 
cations. They should be forced to correct 
these dangerous conditions without argu¬ 
ment by their directors. 

Many bank officers are suffering from 
egotism; some are inefficient; some lack ex¬ 
perience, and many are just plain stub¬ 
born. The majority dislike being criti¬ 
cized or corrected and will not admit the 
possibility of a defalcation in their institu¬ 
tion. When one does occur they tumble 
from the pedestal on which they have been 
placed by their own vivid imagination. In 
case of a shortage, directors should bear in 
mind that this type of officer, although the 
underlying cause, cannot and will not 
shoulder all of the responsibility. Their 
duty is plain and should be done regard¬ 
less of any officers. 

Bank directors are a class unto them¬ 
selves. They reign supreme. Possibly 

[ 14-4 ] 


BANK DEFALCATIONS 


there is some similarity between them and 
the indolent boy in the family who has 
grown so big that no one dares to spank 
him. Usually it is not good policy for a 
bank examiner to talk to them the way 
many deserve, except in cases where their 
negligence has caused disastrous results. 

The class of officers other than those 
previously referred to, the men of much 
training and experience, broad and open- 
minded, always ready to learn and im¬ 
prove, do not dare to talk to their directors 
the way they would like to, and yet they 
are not vested with sufficient authority to 
make any important changes on their own 
initiative. 

There are few directors, indeed, who 
would not resent being talked to person¬ 
ally in the manner in which the writer has 
endeavored to arouse them through this 
volume. 

Undoubtedly there is a crying need for 
this “straight-from-the-shoulder talk” to 

[ 145 ] 


BANK DEFALCATIONS 


bank directors and it would seem that this 
talk should be in writing so that these busy 
gentlemen could digest its contents during 
any leisure moments they might have. 

There may be some who still feel that 
defalcations are matters for the surety 
companies to worry over in spite of what 
has been said herein to the contrary. Will 
these gentlemen, after laying this book 
aside, please be fair-minded enough to con¬ 
sider well their answer to the following 
question: 

“Is it just for a bank which takes 
every precaution, a bank which thinks of 
safety first, last and all the time (fortu¬ 
nately there are many of them), to pay the 
same rates on fidelity bonds as the bank 
which ‘invites’ its employees to help them¬ 
selves?” 

When burglary policies are issued cer¬ 
tain regulations must be complied with, 
and the rate is based in accordance with the 
risk, likewise with fire, life and all other 
[ 146 ] 


BANK DEFALCATIONS 


insurance except risks on bank employees. 
The free and easy manner of surety com¬ 
panies in accepting any and all bank risks 
certainly does not help to reduce the num¬ 
ber of defalcations nor does it discourage 
institutions which are inclined toward 
loose and dangerous practices. 

The very seeds which have been known 
to grow into large defalcations are herein 
pointed out. Advice as to eliminating the 
opportunity and guarding against the de¬ 
sire has also been given, and it is hoped 
that directors will profit thereby. May 
they look at their positions from a differ¬ 
ent angle, realizing their full duty, their 
responsibility and their ever-present lia¬ 
bility. 

No one can foresee what bank will be 
the next to receive unfavorable newspaper 
publicity, possibly to the extent of appear¬ 
ing in large and damaging headlines. 
Now is the time to forestall this possibility 
[ 147 ] 


BANK DEFALCATIONS 


by attacking the opportunity today —and 
the desire tomorrow. 

There may be some directors who will 
feel that their institutions are too small to 
adopt modern preventive methods. These 
men should stop to think that possibly 
their bank is also too small to receive the 
money of the entrusting public and that it 
might be better for all concerned if the 
business were immediately liquidated. The 
smaller the bank the more reason for safe¬ 
guards, as there are fewer employees and 
more opportunities to satisfy a desire to 
default than in the large bank. 

It would be probably “chasing a rain¬ 
bow” to try to stop bank defalcations en¬ 
tirely, but it is the plain duty of every bank 
director, to himself, to the public and to 
his employees, one of whom might become 
a defaulter, to correct conditions which in¬ 
vite and encourage crime. To be derelict 
in this duty would be a betrayal of pub¬ 
lic confidence. 


[ US ] 


BANK DEFALCATIONS 


Many penitentiary inmates are former 
bank employees, as we all know, and to 
hear the details of their particular cases, 
after they have had ample time to med¬ 
itate and nothing to gain from false state¬ 
ments, would cause one to wonder if they 
themselves were entirely to blame. At 
any rate, the thought would occur as to 
how simple it might have been to have pre¬ 
vented their ruination had the opportunity 
to default not existed. 

In pointing out to directors their full 
duty and in otherwise talking to them 
“straight from the shoulder,” the writer 
has intended no disrespect, and trusts that 
this advice will be accepted in the spirit in 
which it is given, for after all, our one big 
and common purpose is to make a clean 
business cleaner. 

Should the circulation of this volume 
result directly or otherwise in saving from 
an ultimate prison term a single individual 
[ 149 ] 


BANK DEFALCATIONS 


who may not really be a thief, but might 
become a victim of circumstances, the 
writer will feel amply remunerated. 


























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